Anna 
The highly anticipated Consumer Price Index (CPI) data for Canada is scheduled for release by Statistics Canada on Tuesday at 13:30 GMT. Investors are closely watching this high-impact economic indicator as it is expected to significantly influence market perceptions regarding a potential interest rate cut by the Bank of Canada (BoC) this year, thereby impacting the valuation of the Canadian Dollar.
Anticipated Inflation Rate for Canada
Economists are projecting the Canadian CPI to exhibit an annual growth rate of 3.3% in January, a slight deceleration from the 3.4% growth observed in December. On a monthly basis, analysts anticipate a rebound in CPI inflation, reaching 0.4% for January following a 0.3% decline in December. In December, the Core CPI experienced a 0.1% month-on-month increase.
Additional Focus on BoC Core Consumer Price Index Data
In conjunction with the CPI data, the Bank of Canada (BoC) will release its closely monitored Core Consumer Price Index data, excluding volatile items such as food and energy prices. In the previous month of December, the annual BoC Core CPI showed a 2.6% rise, while the monthly BoC Core CPI experienced a 0.5% decline.
Factors Influencing Inflation Trends
The anticipated moderation in the headline annual Canadian CPI inflation is attributed to lower prices in the energy and food sectors. However, core CPI figures are expected to remain relatively stable, influenced by the BoC’s elevated borrowing costs, leading to increased mortgage interest rates and rents.
Insights from Analysts at TD Securities (TDS)
Analysts at TD Securities (TDS) provided a preview of the upcoming Canadian inflation report, stating, “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.”
Bank of Canada’s Stance
As per Canada’s overnight index swaps (OIS) curve, the likelihood of a first-rate cut by the BoC is expected in July. Bank of Canada Governor Tiff Macklem, in a recent event, mentioned that “the policy discussion is shifting from whether or not the policy is restrictive enough to how long it should remain restrictive.” He emphasized the gradual path back to 2.0% inflation and highlighted the risks associated with shelter prices being the largest contributor to above-target inflation.
Impact on USD/CAD Exchange Rate
The Canadian Dollar has been in recovery mode from its two-month lows of 1.3586 against the US Dollar, heading into the Tuesday CPI release. While strong inflation data from the United States supported the US Dollar last week, expectations of delayed US Federal Reserve (Fed) rate cuts have limited the Greenback’s upward potential. Market sentiment currently indicates a 66% probability of a June Fed rate cut, according to the CME Group’s FedWatch Tool.
The outcome of the Canadian CPI data will play a crucial role in shaping the future of the USD/CAD exchange rate. A stronger-than-expected performance in both headline and core CPI figures may reinforce the BoC’s narrative of “higher interest rates for longer,” potentially driving USD/CAD back towards the 1.3400 area. On the other hand, weaker Canadian inflation data could revive early BoC rate cut speculations, allowing USD/CAD to resume its upward trajectory toward 1.3600.
Conclusion
The forthcoming release of Canada’s CPI data is poised to be a crucial factor in shaping market sentiment and influencing the USD/CAD exchange rate. Investors and analysts are keenly observing the inflation figures as they navigate through the intricate landscape of global economic uncertainties and shifting central bank policies.
