Canadian CPI rose below expectations in February

According to Statistics Canada's report on Tuesday, the inflation rate in Canada, as indicated by the Consumer Price Index (CPI), eased to 2.8% annually in February from January's 2.9%. This figure fell short of the market's anticipated 3.1%. On a monthly basis, the CPI rose by 0.3% (from 0% in the previous month).

During the same period, the annual BoC's Core CPI, which excludes the impact of volatile food and energy prices, rose by 2.1%, down from January's 2.4%.

From the press release: "Prices for food purchased from stores continued to ease on a year-over-year basis in February (+2.4%) compared with January (+3.4%). Slower price growth was broad-based with prices for fresh fruit (-2.6%), processed meat (-0.6%) and fish (-1.3%) declining, while other food preparations (+1.4%), preserved fruit and fruit preparations (+4.0%), cereal products (+1.7%) and dairy products (+0.6%) decelerated in February."

Price growth for groceries eases in February

February was the first month since October 2021 that grocery prices increased at a slower rate than headline inflation. The slower price growth is partially attributable to a base-year effect, as food purchased from stores rose 0.7% month over month in February 2023, due to supply constraints amid unfavourable weather in growing regions, as well as higher input costs.

Market reaction to Canada CPI data

Following the subdued inflation figures for February, the Canadian Dollar faced exacerbated downward pressure, lifting USD/CAD north of 1.3600 the figure, or multi-day highs.

This section below was published as a preview of the Canadian inflation data at 07:00 GMT.

• The Canadian Consumer Price Index is expected to have risen by 3.1% YoY in February.
• The BoC shows no rush to lower its interest rate.
• The Canadian Dollar maintains its multi-day lows against the US Dollar around 1.3540.

Canada is slated to unveil the always-relevant inflation-related figures on Tuesday. Statistics Canada will release the Consumer Price Index (CPI) for the month of February, with expectations pointing towards a year-on-year rise of 3.1% in the headline print, slightly surpassing January’s 2.9% increase. Monthly projections anticipate a 0.6% increase in the index compared to the previous month's flat reading.

Alongside the CPI data, the Bank of Canada (BoC) will release its Core Consumer Price Index gauge, which excludes volatile elements like food and energy costs. In January, the BoC Core CPI indicated a monthly uptick of 0.1% and a year-on-year rise of 2.4%.

These statistics will be closely monitored as they could influence the trajectory of the Canadian Dollar (CAD) and shape outlooks regarding the Bank of Canada's monetary policy. Speaking about the Canadian Dollar (CAD), it has shown weakness against the US Dollar (USD) in past sessions and presently hovers around multi-session lows well past the 1.3500 yardstick.
 

What to expect from Canada’s inflation rate?

Analysts expect a pick-up of price pressures throughout Canada during last month. In fact, inflation measured by annual changes in the Consumer Price Index, is forecast to resume its upward trajectory in February, mirroring trends observed in many of Canada's G10 counterparts, notably its neighbour, the US. After reaching 4% in August, the CPI has shown a downward trend, with the exception of the bounce recorded in the last month of the year. All in all, inflation indicators still remain well above the Bank of Canada's 2% target.

Should the forthcoming data confirm the anticipated increase in inflationary pressures, investors might consider the possibility of the central bank keeping the current restrictive stance in place for a longer duration than originally predicted. Still, any additional tightening of monetary conditions seems unlikely, as per comments from the bank’s officials.

The latter situation would necessitate a sudden and sustained resurgence of price pressures and a rapid increase in consumer demand, both of which seem improbable in the foreseeable future.

During his remarks at the latest BoC meeting, Governor Tiff Macklem expressed optimism about the ongoing battle against inflation, noting current progress and anticipating further advancements. He highlighted the significance of core inflation measures, suggesting that if they remain unchanged, the forecasts for overall inflation reduction may not come to fruition. He assessed the risks to the inflation outlook as reasonably balanced and noted that well-anchored inflation expectations are aiding efforts to bring inflation back under control.

When is the Canada CPI data due and how could it affect USD/CAD?

On Tuesday at 12:30 GMT, Canada is set to release the Consumer Price Index for February. The Canadian Dollar's potential response is tied to changes in monetary policy expectations by the Bank of Canada. However, barring any real surprise in either direction, the BoC is unlikely to change its current cautious monetary policy stance, in line with other central banks such as the Federal Reserve (Fed).

The USD/CAD has started the new trading year in quite a bullish fashion, although the uptrend appears to have met a decent barrier around the 1.3600 zone.

Pablo Piovano, Senior Analyst at FXStreet, says: “There is a strong likelihood of USD/CAD maintaining the constructive bias as long as it remains above the significant 200-day Simple Moving Average (SMA) at 1.3479. The bullish sentiment is expected to strengthen even more if there is a sustained break above the so-far yearly tops around 1.3600. On the flip side, the breach of the 200-day SMA could open the door to extra losses and a potential move to the January low of 1.3358 (January 31). South from here, there are no support levels of note prior to the December 2023 bottom of 1.3177, which occurred on December 27”.

Pablo adds: "Significant increases in volatility around CAD would require unexpected inflation figures. If the numbers fall below expectations, it could strengthen the argument for potential interest rate cuts by the BoC in the next few months, further appreciating USD/CAD. However, a rebound in the CPI, similar to trends observed in the US, might provide some support to the Canadian Dollar, although to a limited extent. A higher-than-anticipated inflation reading would intensify pressure on the Bank of Canada to maintain elevated rates for an extended period, potentially resulting in prolonged challenges for many Canadians dealing with higher interest rates, as highlighted by Bank of Canada Governor Macklem."