USD / CAD - Canadian Dollar Gets Inflation Boost

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- Loonie jumps 1.2% after Canada CPI surges to 6.7% y/y

- EURUSD underpinned by hawkish ECB comments

- US dollar on the defensive again

USDCAD Snapshot: open 1.2472-76, overnight range 1.2460-1.2500, previous close 1.2495, WTI open $103.14, Gold open $1,945.63

The Canadian dollar consolidated yesterday’s inflation gains overnight, opening in NY as the second best-performing G-10 currency compared to Wednesday’s close.

Things are getting expensive in Canada. Statistics Canada reported, “In March, Canadian consumer prices increased 6.7% year over year, one percentage point higher than the gain in February (+5.7%). This was the largest increase since January 1991 (+6.9%). Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year over year in March, the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.”

Economists were expecting a 6.1% y/y increase for the headline and a 4.2% rise in Core-CPI.

The substantially higher than expected results got their attention. Many are now forecasting Bank of Canada (BoC) rate hikes of 0.50% on June 1 and another 0.50% hike on July 13. In addition, they expect 0.25% at the following three meetings making the overnight rate 2.75% by year-end.

The BoC is committed to getting inflation down to its 2.0% target. Governor Tiff Macklem said inflation would fall to 2.5% by the second half of 2023. He also said the neutral interest rate (defined as the level that neither stimulates nor weighs on the economy) is in the 2.0-3.0% area).

The math doesn’t work. If Canadian rates finish the year at 2.75%, they will still be below the top of the “neutral rate “ range. Arguably the overnight rate needs to rise faster than economists are projecting in order to tame inflation.

Soaring inflation is not just a Canadian problem. The Euro area is suffering as well. This morning Eurostat reported, “The euro area annual inflation rate was 7.4% in March 2022, up from 5.9% in February.”

Those results spooked some ECB policymakers. Luis de Guindos said “the ECB should be able to end asset purchases and raise interest rates in July. A colleague, Pierre Wunsch, said “Without any really bad news coming from that front, hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.”

EURUSD soared on the news rising from 1.0825 to 1.0935 before easing in early NY trading.

Broad US dollar weakness lifted GBPUSD from 1.3044-1.3089, although EURGBP demand limited gains.

USDJPY traded lower, tracking the softer 10-year Treasury yield, which consolidated in a 2.845%-2.898% range. Prices dropped from 128.61 to 127.63 before bouncing to 128.10 in NY.

NZDUSD rallied after a higher than expected inflation report which lifted the currency pair from 0.6769 to 0.6808.
Weekly jobless claims and Philadelphia Fed Manufacturing data are ahead.

Learn how KnightsbridgeFX can help you save up to 2% when buying or selling US dollars compared to your Canadian bank’s rates – click here to compare bank rates