Canadian dollar under pressure as inflation print opens door to April rate cut

PoundSterlingLIVE – The Canadian Dollar fell across the board after Canadian inflation numbers for January undershot expectations and raised the odds of a rate cut at the happening as early as April.

The Pound to Canadian Dollar rose half a per cent in the minutes following Statistics Canada announcing the consumer price index fell to 2.9% year-on-year in January, below expectations for 3.3% and down from 3.4% in December. The Dollar to Canadian Dollar exchange rate was higher by 0.20% on the day at 1.3515.

The Canadian inflation numbers were soft across the board, with the monthly change in flat at 0%, whereas a rise to 0.4% was expected. Core inflation fell to 2.4% from 2.6% following a 0.1% m/m increase.

“At roughly 30%, markets are seriously underpricing the BoC easing in April,” says Simon Harvey, Head of FX Analysis at Monex Europe. The fall in Canadian bond yields and CAD is a result of markets revising expectations on the outlook for domestic interest rates.

The Bank of Canada has said it will maintain interest rates at 5.0% for some time as it wants clear evidence inflation will fall to 2.0% on a sustained basis.

These inflation data will give the central bank a little more confidence that it has succeeded and that it could soon be time to allow the economy to breathe by lowering interest rates.

Two key measures watched by the Bank of Canada, CPI trim and median, remained elevated at 3.4% and 3.3%, respectively, although these were a couple of ticks lower than consensus expectations.

“Overall, it appears that the sluggishness in consumer demand is finally impacting pricing in areas of more discretionary spending. That is a positive sign for the Bank of Canada, and will have financial markets pulling forward expectations for a first interest rate cut today, which we see being delivered in June,” says Andrew Grantham, an economist at CIBC.

An original version of this article can be viewed at Pound Sterling Live