On Tuesday 17th January, the Bank of Canada released its latest Consumer Price Index (CPI) report, which printed a miss against the predicted consensus.
The CPI measures the change in the price of a basket of goods and services consumed by households and is used to gauge the rate of inflation in an economy. The Bank of Canada's target for inflation is 2%, and although inflation currently sits well above this target, many predict that the aggressive tightening methods used by the BoC in their monetary policy will soon begin to wind down. With recent US CPI releases also coming in below the consensus, investors are beginning to see a light at the end of the tunnel for soaring inflation and tight monetary policy. If the Fed begins to loosen its policy, the BoC could follow suit.
Key Points
The recently weaker CAD makes Canadian exports less expensive for foreign buyers, which can can provide a boost to the country's export sector. However, it can also make imports more expensive, leading to higher consumer prices. Following the release of the CPI figures, and the miss on the consensus, the value of the USD/CAD currency pair remained flat on the day (17/01) before rallying over 1% in late trading following the release of the US Retail Sales figures the following day (18/01).
The BoC has the release of the Retail Sales Report set for Friday 20th January followed by the next monetary policy review on Friday 25th which could cause further volatility in an already choppy USD/CAD, even more so if Canadian retail sales fail to hit or surpass the consensus in suit with its latest CPI release, so investors await the next release for more clarity on the Loonie and the Canadian economy as a whole.
After Tuesday's report, many traders have risen the probability of a 25-basis-point hike to around 90% from the previous 80% strengthening the belief that Macklem will be making this apparent next week.
Summary
At the time of writing, USD/CAD stands just short of $1.35 with traders eagerly awaiting the release of the Retail Sales report and the news from the Bank of Canada (BoC) on their upcoming Monetary Policy review next week on Wednesday 25th January. This report should give an insight into the strength of the Canadian economy, and any changes in the report can have a significant impact on CAD currency pairs. The review can provide clues on the direction of interest rates and any potential changes to monetary policy. As such, many traders are closely monitoring the USD/CAD exchange rate in the lead-up to these events, as any shifts in the value of the Canadian dollar can have a significant impact on their investments.
Overall, it's a critical time for the Canadian economy and investors are keenly watching for any signs of change in the coming days, particularly with signs the US Federal Bank will soon wind down their monetary policy tightening; could the BoC follow suit?
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