Where Is USD/CAD Headed After CPI Figures

Posted Tuesday, June 27, 2023 by
Skerdian Meta • 2 min read

The Canadian Dollar has had an impressive performance in recent weeks, particularly against the US Dollar. This is noteworthy considering the decline in crude Oil prices, which typically have a strong correlation with the CAD, but the CAD is following the Bank of Canada this time.

While attention has been focused on the rate paths of other major central banks, such as the US Federal Reserve and the European Central Bank, the Bank of Canada (BoC) has somewhat slipped under the radar. However, last week, the minutes by the BOC from the June meeting revealed discussions regarding the rate hike implemented in June, along with indications of a potential further hike in July. The BOC expressed surprise at the strength of the economy, noting resilient household consumption and persistent price pressures across various sectors.

So, now the market is pricing in a 25 basis points hike in July, and this week’s data from Canada is likely to be crucial in assessing the economic landscape. The release of May’s inflation data, especially in light of persistent price pressures experienced in other developed economies like the UK, was closely watched. Additionally, the GDP report for April, which is expected to show a 0.2% growth after falling flat in March, will be released on Friday will also be important. If inflation and weekly earnings show an increase, it could support the CAD as rate hike expectations are likely to be adjusted in a more hawkish direction. As we approach the third quarter, there is much to analyze and consider for the Canadian Dollar.

Canada CPI Inflation Report for May

May CPI 3.4% y/y versus 3.4% expected
Lowest reading since June 2021
Prior was 4.4%
CPI m/m +0.4% vs +0.5% expected
Prior m/m reading was 0.7%
Gasoline prices -18.3% vs -7.7% y/y in prior month
Gasoline prices -0.8% m/m vs +6.3% prior month
Ex gasoline +4.4% vs +4.9% prior
Food +8.3% vs +9.1% y/y prior
Mortgage interest costs 4.9% y/y vs 4.9% increase in April
Goods inflation +2.1% y/y
Services inflation +4.9%

Core measures:

BOC core y/y 3.7% vs 3.9% expected (prior 4.1%)
BOC core m/m +0.4% vs +0.5% prior
Median 3.9% vs 4.2% prior
Trim 3.8% vs 4.2% prior
Common 5.2% vs 5.7% prior

This is the final CPI print ahead of the July 12 Bank of Canada rate decision. Ahead of the release, the market was placing a 65% probabilty on a 25 bps rate hike and that ticked to 62% afterwards. I maintain that the BOC is making a mistake in hiking further rather than simply letting high rates do their thing to a heavily-indebted Canadian consumer.