Canada's Consumer Price Index (CPI) showed an unexpected acceleration in September, rising to 2.4% year-over-year. This increase, above the forecasted 2.3%, has led to a reduction in market expectations for an interest rate cut by the Bank of Canada (BoC) later this month.
The Canadian dollar (CAD) steadied against the US dollar (USD) on Tuesday, recovering from earlier losses as the inflation data shifted market sentiment. The USD/CAD pair currently trades around 1.4030, easing from its session highs.
Key Takeaways
- Canada's headline CPI rose to 2.4% annually in September, exceeding forecasts.
- Monthly CPI also increased by 0.1%, reversing a previous decline.
- Odds of a 25-basis-point BoC rate cut on October 28 have fallen from 86% to 74%.
- Rising food costs and smaller gasoline price declines drove the inflation uptick.
- US Dollar remains strong amid easing US-China trade tensions.
Inflation Exceeds Expectations in September
The latest inflation figures from Canada indicate a stronger-than-anticipated rise in consumer prices. The headline Consumer Price Index (CPI) for September registered a 2.4% increase year-over-year. This marks an acceleration from the 1.9% recorded in August and surpassed the market consensus of 2.3%.
On a monthly basis, the CPI saw a 0.1% increase, defying expectations and reversing a 0.1% decline from the previous month. This uptick suggests that underlying price pressures within the Canadian economy remain persistent.
Inflation Drivers
- Smaller declines in gasoline prices contributed to the overall rise.
- Firmer food costs also played a significant role in pushing inflation higher.
Core Inflation Measures Also Rise
Beyond the headline figures, the Bank of Canada’s core CPI, which excludes volatile items, also showed an increase. On a monthly basis, core CPI rose 0.2% after being flat in August. Annually, the core CPI climbed to 2.8% from 2.6%.
The broader core inflation gauge, another key metric for policymakers, increased by 0.3% month-over-month, compared to 0.2% in August. These sustained increases in core measures suggest that inflationary pressures are not just from external factors but are more deeply embedded in the economy.
Impact on Bank of Canada Rate Cut Expectations
The stronger inflation data has directly influenced market expectations regarding the Bank of Canada’s monetary policy. Before the release, the swap market priced an 86% chance of a 25-basis-point (bps) interest rate cut at the BoC’s upcoming meeting on October 28.
Following the inflation report, these odds have significantly decreased to approximately 74%. This shift indicates that traders now see a lower probability of the central bank easing its monetary policy in the immediate future, given the persistent inflationary environment.
"The recent inflation data suggests that the Bank of Canada may adopt a more cautious stance on rate cuts than previously anticipated," noted a market analyst. "Sticky price pressures could prompt them to hold rates steady for longer."
Monetary Policy Context
Central banks often use interest rate adjustments to manage inflation and economic growth. When inflation is high, they may raise rates to cool the economy. Conversely, they might cut rates to stimulate growth when inflation is low or the economy slows. The BoC aims for a 2% inflation target.
Canadian Dollar Stabilizes as Oil Prices Decline
Despite the positive impact of the inflation data, the Canadian dollar faces headwinds from declining oil prices. West Texas Intermediate (WTI) Crude Oil is currently trading near five-month lows, hovering around $57 per barrel.
As a commodity-linked currency, the CAD often moves in tandem with oil prices. Lower oil prices typically exert downward pressure on the Canadian dollar, partially offsetting the support it receives from domestic economic data.
US Dollar Strengthens Amid Easing Trade Tensions
Across the border, the US dollar continues to firm against major currencies. Easing trade tensions between the United States and China have shifted market focus away from the prolonged government shutdown, now in its fourth week.
The improved tone in bilateral relations has provided support for the greenback. The US Dollar Index (DXY), which measures the dollar's strength against a basket of currencies, is nearing one-week highs around 98.84, marking its third consecutive day of gains.
Upcoming US Economic Data
Investors are now looking ahead to the upcoming US Consumer Price Index (CPI) data, scheduled for release on Friday. This report could offer crucial new insights into the Federal Reserve’s (Fed) monetary policy outlook, potentially influencing the dollar's trajectory further.
The US dollar has shown strength against most major counterparts today. It recorded a 0.73% gain against the Japanese Yen and a 0.36% gain against the Australian dollar. However, it saw a slight decline of 0.05% against the Canadian dollar, illustrating the balancing act of global economic factors.
The Euro (EUR/USD) has maintained its bearish performance, slipping back towards the 1.1600 level due to the stronger US dollar. Similarly, the British Pound (GBP/USD) remains on the defensive, trading below 1.3400, as traders await the UK inflation report due on Wednesday for clues on the Bank of England's next move.
