Breaking: Canada CPI inflation falls to 2.9% vs. 3.3% expected

Inflation in Canada, as measured by the change in the Consumer Price Index (CPI), softened to 2.9% on a yearly basis in January from 3.4% in December, Statistics Canada reported on Tuesday. This reading came in below the market expectation of 3.3%. On a monthly basis, the CPI was unchanged, compared to analysts' estimate for an increase of 0.4%.

The annual Core CPI, which excludes volatile food and energy prices, was up 2.4% in the same period, down from 2.6% recorded in December.

"The largest contributor to headline deceleration was lower year-over-year prices for gasoline in January (-4.0%) compared with December (+1.4%)," Statistics Canada noted in the press release. "Excluding gasoline, headline CPI slowed to 3.2% year over year in January, down from the 3.5% growth in December." 

Market reaction to Canada CPI data

The Canadian Dollar came under bearish pressure following the soft inflation readings for January. At the time of press, the USD/CAD pair was up 0.2% on the day at 1.3515.

Canadian Dollar price today

The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies today. Canadian Dollar was the weakest against the New Zealand Dollar.

USD   -0.34% -0.29% 0.04% -0.53% -0.16% -0.55% -0.23%
EUR 0.34%   0.05% 0.42% -0.18% 0.18% -0.20% 0.11%
GBP 0.30% -0.05%   0.34% -0.24% 0.13% -0.25% 0.06%
CAD -0.04% -0.38% -0.31%   -0.56% -0.20% -0.60% -0.27%
AUD 0.53% 0.18% 0.24% 0.59%   0.36% -0.03% 0.29%
JPY 0.16% -0.16% -0.13% 0.24% -0.34%   -0.40% -0.08%
NZD 0.55% 0.21% 0.29% 0.59% 0.03% 0.42%   0.32%
CHF 0.24% -0.11% -0.05% 0.27% -0.29% 0.07% -0.32%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).


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

  • The Canadian Consumer Price Index is forecast to rise 3.3% YoY in January.
  • Canada’s CPI inflation data is set to impact the timing of a Bank of Canada rate cut.
  • Statistics Canada will publish the CPI inflation data on Tuesday.

The high-impact Consumer Price Index (CPI) data from Canada will be published by Statistics Canada on Tuesday at 13:30 GMT. The CPI inflation data is likely to have a significant influence on the market’s pricing of an expected Bank of Canada (BoC) interest rate cut this year, impacting the value of the Canadian Dollar.

What to expect from Canada’s inflation rate?

Economists expect the Canadian CPI to rise at an annual rate of 3.3% in January, slowing from a 3.4% growth recorded in December. On a monthly basis, the CPI inflation is seen rebounding to 0.4% in the same period after December’s 0.3% decline. The Core CPI rose 0.1% MoM in December. 

Alongside the CPI data, the Bank of Canada (BoC) will publish its closely watched Core Consumer Price Index data, which excludes volatile items such as food and energy prices. In December, the annual BoC Core CPI rose 2.6% while the monthly BoC Core CPI dropped 0.5%.

The expected slowdown in the headline annual Canadian CPI inflation could be attributed to lower energy and food prices. However, core CPI figures are likely to remain sticky, in the face of the BoC’s higher borrowing costs, which have led to rising mortgage interest costs and rents.

Previewing the Canadian inflation report, analysts at TD Securities (TDS) noted: “We look for headline CPI to fall 0.2pp to 3.2% y/y in Jan as prices rise by 0.4% m/m, but details should reinforce limited progress. Food/energy components will drive most of the deceleration as 3m rates of core CPI accelerate from Dec. That should result in a mixed tone overall and the persistence in underlying inflation sets a high bar for any dovish shift from the BoC in March.”

According to Canada’s overnight index swaps (OIS) curve, a first-rate cut by the BoC is likely seen in July. 

Bank of Canada Governor Tiff Macklem, at the Montreal Council on Foreign Relations event last week, said that “the policy discussion is shifting from whether or not the policy is restrictive enough to how long it should remain restrictive.”

“The path back to 2.0% inflation is likely to be slow,” Mackem said, warning that “risks remain, as shelter prices are now the biggest contributor to above-target inflation.”

How could the Canada CPI data affect USD/CAD?

The Canadian Dollar is consolidating its recovery from two-month lows of 1.3586 against the US Dollar heading toward Tuesday’s CPI showdown. Hot inflation data from the United States helped the US Dollar gain some ground last week but growing expectations of delayed US Federal Reserve (Fed) rate cuts capped the Greenback’s upside. Markets now price in a 66% chance of a June Fed rate cut, the CME Group’s FedWatch Tool shows.

The Canadian Dollar could extend its recovery if the headline and core CPI figures come in hotter-than-expected and reinforce the BoC’s narrative of “higher interest rates for longer”. In such a case, USD/CAD could revisit the 1.3400 area. In contrast, soft Canadian inflation data could bring back early BoC rate cuts bets on the table, allowing USD/CAD to resume its uptrend toward 1.3600.

Dhwani Mehta, FXStreet’s Senior Analyst offers key technical levels for trading USD/CAD on Canada’s inflation report: “USD/CAD continues to defend the horizontal 21-day Simple Moving Average (SMA) at 1.3470, as the 14-day Relative Strength Index (RSI) indicator sits above the midline.”

“If the 21-day SMA at 1.3470 holds the fort, USD/CAD could rebound to challenge the 100-day SMA at 1.3550 on its way to the two-month high of 1.3586. Further up, the 1.3600 round level will be on buyers’ radars. On the downside, daily closing below the 21-day SMA will reopen floors for a test of the 50-day SMA at 1.3410. The next relevant downside target is seen at the February low of 1.3365,” Dhwani adds. 

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

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