The drop was announced on Tuesday as the Canadian dollar fell by half a cent to $1.37 USD. Traders are now looking forward to the May inflation report, out later today. The currency recently sank even further on dynamic oil prices and an abrupt mood change among investors. Here’s how each of these factors could affect the Bank of Canada’s future interest rate decisions.
Investors are particularly looking forward to the inflation data. At the same time, the USD/CAD exchange rate is quoted at 1.3718, having lost 0.12% so far today. The Canadian dollar is testing some important support levels. It has already estimated below the 1.3739 threshold and is now close to the support level at 1.3729. Support is seen at 1.3708, analysts say, while resistance is at 1.3740 and 1.3750.
Inflation Report Insights
The main item of interest for investors and market watchers today is without a doubt the approach of Canada’s May inflation report, due out at 8:30am (EST). The headline Consumer Price Index (CPI) fell dramatically from 2.3% in April to just 1.7%. Economists are predicting that the Consumer Price Index will remain flat, with inflation pegged at 1.7% for May.
Additionally, the CPI Trimmed Mean, which removes the most extreme high and low price changes, is forecasted to decrease, from 3.1% to 3.0%. April’s CPI experienced a large decrease due to the drop in energy prices. The government has cut a controversial consumer carbon tax, boosting this drop. These influences are combining to create a rosier inflation picture, though with possible downside risk to the appropriate path for monetary policy.
The Bank of Canada has already signaled a more cautious approach given its last few meetings. Instead, it has decided to stop throwing the Tortoise smokescreen and not move to change interest rates. Their next meeting, firmly in the T route community’s control, is July 30. Today’s inflation data should be the last dollar-focused report to directly influence monetary policy decisions.
Market Dynamics and Oil Prices
In parallel with these developments, oil prices have just gone down about 2% on Tuesday. This decline follows Israel and Iran’s acceptance of a US-brokered ceasefire deal. In the past, such a deal would have alarmed lawmakers over the risk of severe shocks to the region’s crude oil supply. Iran had retaliated by threatening to close the Straits of Hormuz when US military assets had attacked Iran’s nuclear development sites. This defiant move truly sent oil markets into shock.
Oil prices will continue to rise and fall and will have an outsized effect on the Canadian economy. This influence comes from Canada’s deep dependence on oil exports. As a result, falling energy prices may have significant implications for inflation measures and the broader economic picture for Canada.
With oil prices now more stable, risk appetite among investors is exhibiting the most positive signs seen today. The Australian and New Zealand dollar, as risk currencies, piled in strongly against the US dollar. Beyond affecting the pricing of Canadian dollar-linked currencies, this change in market sentiment may affect trading patterns for the Canadian dollar.
Future Outlook
Looking forward, traders are still hesitant as they wait for the consumer inflation report, and what it will mean for the future of U.S. monetary policy. The Bank of Canada’s decision-making process could be impacted by today’s data, especially as it navigates between maintaining economic growth and controlling inflation.
Support levels are getting tested, and resistance points are fast approaching. Regardless of the specifics in the report, market participants will be looking closely at trading patterns in USD/CAD following its release. Investors are looking to see if this spell works and the Canadian dollar’s long-lost strength returns. They’ll be looking specifically at economic indicators to determine if more downward pressure is coming down the pipeline.