USD/CAD: Loonie set to rock the greenback should inflation beat the target

The combination of rising retail sales and higher inflation in Canada is good news for trader betting on Lonie as the rising tandem makes a perfect case for the Bank of Canada raising policy rates.

The case of October retail sales rising 1.5% over the month and November inflation rising 2.1% over the year helped Lonnie to climb as much as 0.8% in a knee-jerk reaction. Should the rising demand represented by increasing retail sales and higher output continue, the sensitivity to drift in inflation will raise.

With the inflation rising only 0.1% above the inflation target, we can not talk about persistent price pressures, especially with core inflation dwelling well below at 1.5% y/y. Nevertheless, next rate increase should become more realistic now. Especially as between now and the next meeting scheduled for January 17 there will be no inflation release available for consideration.

The case of the Bank of Canada hiking its target for the overnight rate from 1% is reinforced by the fact that in January new Monetary Policy report will be published and the bank of Canada indicated its sensitivity to inflation saying:”while higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

The USD/CAD should boost the Canadian Dollar as it has busted the key support level of $1.2720, breaking a current sideways trend.

Technical outlook

The current trend on USD/CAD is sideways with the exchange rate moving within C$1.2720 represented on the downside by 38.2% Fibonacci retracement of long-term appreciation of Loonie towards C$1.2097 cyclical low and C$1.2920 represented by 50% Fibonacci retracement of the same move.

Should USD/CAD close below a key support level of C$1.2720, next target for the currency pair is at C$1.2470 represented by 28.2% Fibonacci retracement and supported by Slow Stochastic crossover within the Overbought territory.  

USD/CAD daily chart

November inflation above target

The consumer price index (CPI) in Canada rose 0.3% over the month, but the rate of growth reached 2.1% when compared to a year ago, indicating that the price pressures are arising in Canada.

With inflation rate at 2.1% y/y, the January 2017 cyclical high of 2.1% y/y was met and the higher inflation dynamics was in Canada only back in October of 2014. At the same time, core inflation excluding gasoline prices rose 1.5% over the year in November, matching September 2015 high.

Canada’s headline and core inflation