Canadian Dollar Surges as CPI Surges

Canada’s inflation outperforms

The Canadian dollar is up sharply on Wednesday, as Canada’s inflation report was hotter than expected. In the North American session, USD/CAD is trading at 1.2519, down 0.74% on the day.

Canada’s CPI for March jumped 6.7% YoY, a full percentage point higher than the 5.7% gain in February. On a monthly basis, inflation rose 1.4%, up from 1.0% prior. Both the annual and monthly figures were the highest since January 1991. Inflationary pressures are not just increasing, but are widespread across economic sectors. Fuel, food, durable goods, restaurants, air travel – you name it and prices are moving in one direction – up.

The upswing in inflation is a worrying trend for the BoC, and given the tight labor market and solid growth in the economy, we could be treated to a second straight 0.50% rate increase at the June meeting. At last week’s meeting, the central bank raised rates from 0.50% to 1.00%. The Canadian dollar moved higher, as investors liked the oversize rate hike as well as the BoC’s announcement that it would scale back its balance sheet. The BoC appears to be in sync with the Federal Reserve, as the BoC’s rate-tightening cycle could see rates rise as high as 3% but the end of the year. This should help the Canadian dollar keep pace with a Fed-powered US dollar, at least with regard to monetary policy.

We saw 0.50% rate hikes from the BoC and RBNZ last week and the Fed is likely to follow suit at its May meeting, given that US inflation is galloping along at a 40-year high.  FOMC member Bullard is even suggesting that a massive 0.75% hike is a possibility. This stance is not Fed policy, but with talk of a 0.75% increase, a 0.50% move is looking less dramatic, and might not shake up the markets, which have been fed a steady diet of hawkish statements from Fed members over the past few weeks.

USD/CAD Technical

• USD/CAD has broken below resistance at 1.2533. Below, there is support at 1.2451
• There is resistance at 1.2605 and 1.2687