Lower Canadian CPI brings interest rate cut closer

CANADIAN CPI, USDCAD ANALYSIS
- Canadian inflation slows more than expected in February – raising USD/CAD
- Markets bring a potential BoC cut closer while delaying the onset of Fed cuts
- USD/CAD’s bullish response tapered off but pair heads for channel resistance

CANADIAN INFLATION SLOWS MORE THAN EXPECTED IN FEBRUARY – RAISING USD/CAD
Canadian inflation, both core and headline measures, came in lower than last month's figures. CPI was well below the estimated 3.1% at 2.8%. The core measure reached lows not seen in over two years, putting pressure on the Bank of Canada to consider loosening financial conditions. In comparison to countries with inflation rates of 8% or higher, Canada stands out as a standout performer, as shown in the graph below.

Annual Percentage Change in Inflation (CPI)


USDCAD BULLISH RESPONSE TAPERED OFF BUT PAIR HEADS FOR CHANNEL RESISTANCE
USD/CAD continued its bullish momentum after softer inflation data but lost some steam during the New York session. The current upward move was triggered by a bounce off channel support at 1.3420, breaking above the 200-day simple moving average and reaching 1.3500.

1.3500 has previously acted as both support and resistance since October 2022. The current trend aims to test channel resistance, which coincides with the 61.8% Fibonacci retracement level of the major 2020-2022 move (1.3651). However, today's significant upper wick suggests that bulls may need to regroup before pushing higher. Canada has been successful in keeping inflation within the targeted range of 1-3% set by the Bank.

Based on implied probabilities from rate markets, the Bank of Canada may need to prepare for a rate cut in June. There is a 62% chance of a cut at that time. The Canadian dollar may face pressure due to consistently low inflation, which could lead to easing monetary policy.

On the other hand, market estimates for when the Fed may cut interest rates have been pushed back from June to July. This delay in monetary easing supports the US dollar, as it is expected to have a higher interest rate compared to most G7 currencies for a little longer.