During a speech on Tuesday, the CAD rose sharply versus the USD. This increase followed on the heels of the release of Canada’s Consumer Price Index (CPI) report for August. That pushed the headline CPI increase back down to 1.9% year-over-year. While this was a bit of a miss compared to the 2.0% that had been anticipated, it was higher than July’s 1.7% rate. The new data pumped up expectations even more. Most people think the next move for the Bank of Canada (BoC) will be a 25-basis-point rate cut at its next monetary policy meeting.
The CPI report revealed that Canada’s core inflation rate remained unchanged at 2.6%. This figure is on par with last month’s results, short of the 2.7% that was projected. On a more contextually relevant note, the Core CPI advanced a tame 0.2% month-over-month, up from July’s 0.1% pace. This mixed picture underscores the price pressures facing a very complex Canadian economy right now. It also points to a pretty stark chasm between headline inflation and underlying inflation numbers.
USD/CAD currency pair prolonged this decreasing trend for the second consecutive day. It dropped to its lowest price since at least September 1. Indeed, market participants have been pricing in a rate cut by the BoC. This expectation is the result of concern about persistent price pressures that have repeatedly exceeded the central bank’s 2% target. Canada’s Consumer Price Index (CPI) fell by 0.1% this month. This steep drop is a stark turnaround from previous baseline estimates of no increase, and it’s much less than July’s rise of 0.3%.
Together, these advancements led the CAD to appreciate by 0.21% against the US dollar. With this staggering performance, it further entrenches its stranglehold on the currency market. The Swiss Franc (CHF) was the CAD’s third strongest counterpart, appreciating by 0.72%. This recent adjustment further emphasizes the remarkable currency moves due to real time economic data.
Our analysis of the August CPI report reveals important trends affecting affordability in Canada’s inflationary landscape. The headline inflation rate, though still indicative of upward pressure on prices, points to an easing or persisting moderation in inflationary trends. The steady core inflation rate indicates that certain underlying price pressures remain persistent, complicating the BoC’s monetary policy decisions.
It will be the Bank of Canada’s monetary policy meeting Wednesday and it will be the meeting that investors and economists are all focusing their gazes on. The market’s expectation of a rate cut further highlights the break from hawkish to dovish in the sentiment of what’s to come with monetary policy. The BoC has come under intensified criticism for its inflation-targeting framework, most notably as underlyings inflation has remained far too high.
Experts all but agree that more changes to monetary policy are needed. It’s in order to better advance with an evolving economic landscape in Canada, following all these necessary and powerful developments. As such, any actions taken by the BoC will likely influence not only the CAD’s performance but broader market sentiment regarding risk and growth prospects.