On Wednesday, the value of the Canadian Dollar (CAD) increased further in relation to the US Dollar (USD), extending a positive trend for the third consecutive day. The USD/CAD pair fell below 1.3900 as the market reacted to Canada’s upbeat inflation figures and a weaker US Dollar.
The release of Canadian inflation data on Tuesday caused uncertainty in the market, as while the headline figure showed a decrease in inflation, the core measure unexpectedly rose. The headline Consumer Price Index (CPI) dropped from 2.9% in March to 1.7% in April, while the monthly CPI also fell from 0.3% in March to -0.1% in April, falling short of market expectations. However, Canada’s preferred measure, the Bank of Canada’s (BoC) core CPI, rose from 2.2% in March to 2.5% in April, and the monthly CPI increased from 0.1% to 0.5% in the same period.
The decline in headline inflation can be attributed in part to lower energy prices, which saw a 12.7% decrease year-over-year in April. This drop was fueled by the recent removal of the federal carbon tax and OPEC’s decision to increase oil production.
The recent inflation data presents a complex situation for the BoC as it prepares for its June rate decision. The central bank decided to maintain its benchmark interest rate at 2.75% in its April policy meeting. Some economists now predict that further rate cuts may not be necessary.
While headline inflation has decreased, the rise in core measures suggests that underlying price pressure has strengthened in April. According to Benjamin Reitzes, Managing Director of Canadian Rates and Macro Strategist at BMO Capital Markets, this poses a challenge for the BoC and may cause delays in their potential rate cuts.
In addition, the implementation of US trade tariffs has added to the overall uncertainty, potentially leading to higher inflation rates and hindering the central bank’s easing plans.
Meanwhile, the US Dollar Index (DXY), which compares the USD to six major currencies, briefly fell below 100.00 to its lowest point for the week, declining by over 1.2% this week. The US Dollar continues to face pressure due to a weakened US economy following the downgrade of the US sovereign credit rating by Moody’s on May 16 and cautious statements from the Federal Reserve (Fed) regarding the economic outlook.
Traders will closely monitor the upcoming US Purchasing Managers Index (PMI) data on Thursday and Canada’s Retail Sales data on Friday. Additionally, any changes in US economic policies and developments in global trade will greatly influence the direction of the USD/CAD pair.