Will Canadian CPI shake up loonie?

The Canadian dollar has had an uneventful week, but that could change later in the day, as Canada releases CPI data for September.

CPI expected to accelerate

Things are looking rosy for the Canadian dollar. It’s been an outstanding October, with the currency gaining 2.57%.On Tuesday, USD/CAD dropped to 1.2311, its lowest level since July 6th. Oil prices have been booming, which has lifted the commodity-based currency, and stronger risk sentiment has also supported the upswing.

Inflation has surged as the economy emerges from the Covid pandemic and manufacturers struggle to keep up with pent-up demand.  CPI for September is expected to increase to 4.3% from 4.1% (YoY), which would be the highest level of inflation since 2003. Core CPI is also projected to rise, from 3.5% to 3.6%.

The markets will be keeping a close eye on today’s inflation release. If the data shows that inflation is accelerating, the Bank of Canada could respond by scaling back its bond purchase programme. This would make next week’s policy meeting most interesting, as policy makers may provide details of an exit strategy, ahead of a possible rate hike in 2022.

The US dollar received a lift overnight, as the 30-year yield rose higher. The dollar index tested support at 93.50, but has clawed higher and is at 93.82 in Europe. If US Treasuries continue to rise, I would expect the dollar to respond with gains. A Federal Reserve tapering appears imminent, and several Fed officials sounded hawkish about a taper in remarks on Tuesday. The Federal Reserve has insisted that a taper is not linked to an interest rate hike, and even with the surge in inflation, a rate hike does not seem likely before 2023.

USD/CAD technical

• There are support lines at the round number of 1.2300 and 1.2238.

• There is resistance at 1.2462, followed by 1.2562.