USDCAD Price Rallies Higher As Canadian Dollar Weakens on CPI

Key points:
The USDCAD pair rallied higher after the release of Canada’s CPI data.
The Canadian dollar weakened against its US peer triggering the rally.
All eyes are on the Federal Reserve’s rate decision tomorrow.

The USDCAD currency pair rallied higher today after the release of Canada’s August CPI data showed that inflation dropped to 7.0%, which was much lower than analysts’ expectations of 7.3% and a significant decline from the previous figure of 7.6%.

The core CPI prints also missed expectations leading investors to conclude that the Bank of Canada can slow down its rate hikes as inflation slows. The USDCAD pair rallied higher as investors expect the US Federal Reserve to hike interest rates at its next meeting tomorrow.

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Investors further interpreted today’s softer inflation data as a sign that the Bank of Canada’s front-loading of interest rate hikes was finally impacting the country’s economy. The BoC started raising interest rates in March from a baseline of 0.25%.

Canada’s interest rates now stand at 3.25% after a 0.75% rate hike in September and a 1.00% rate hike in July. The Bank of Canada had raised interest rates by 0.50% in April and June, while its first rate hike was a 0.25% increase.

The latest inflation data will likely make the BoC rethink its rate hiking policy. But, many are asking, will the BoC consider reversing its policies by slashing rates soon? So far, the consensus among investors and analysts alike is that the BoC will hold rates at the current highs for a while.

The BoC may be done with its rat hiking cycle, but I do not believe the central bank is ready to start reversing course and lowering interest rates. Investors are focused on the Fed’s monetary policy meeting to end tomorrow, after which they will announce their interest rate decision.

*This is not investment advice.

USDCAD price chart.

USDCAD price 20-09-2022 — Source: Tradingview

The USDCAD currency pair was trading up 90.9 pips (0.69%) at writing as the Canadian dollar weakened against its US peer.