Canadian Dollar Boosted by CPI Surprise

• GBP/CAD languishing near 1.66 & vulnerable
• Canada’s strongest CPI since 1991 weighing
• With Fed, BoE gauntlet looming for GBP/CAD

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The Canadian Dollar retained intraday gains over many currencies Wednesday after inflation figures surprised market expectations again in February, keeping GBP/CAD under pressure near 1.66 ahead of monetary policy decisions from the Federal Reserve (Fed) and Bank of England (BoE).

Canada’s inflation rate climbed by one percent during February when consensus among economists had suggested a smaller 0.9% increase was likely, which was enough to lift the annual rate of price growth from 5.1% to 5.7% and made for the largest increase since August 1991.

Furthermore, and even after excluding changes in gasoline costs, Statistics Canada figures still had inflation rising from 4.3% to 4.7% last month, while the average of the three Bank of Canada (BoC) measures of trimmed inflation crept higher from 3.3% to 3.5%.

“Looking ahead, the spike higher in gasoline prices in early March, despite now partly fading, should see headline inflation accelerate again next month,” says Andrew Grantham, an economist at CIBC Capital Markets.

“Further out, the war in Ukraine will add to food price inflation, and sanctions on Russia combined with new lockdowns in China will lead to renewed supply chain issues, resulting in a slower easing of goods price inflation later this year than we were expecting,” Grantham also said on Wednesday.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD.

• Reference rates at publication:
  GBP to CAD spot: 1.6650
• High street bank rates (indicative): 1.6067 - 1.6184
• Payment specialist rates (indicative: 1.6500 - 1.6530
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Although energy and food costs were significant drivers of February’s inflation, they weren’t by any means the only drivers as shelter costs rose 6.6% and at their fastest pace since 1983 while prices of household items like electrical goods also rose strongly too.

If anything, the data keeps the Bank of Canada on track for the “series” of further interest rate rises that have been repeatedly telegraphed as likely during recent months, which may be why the Canadian Dollar remained buoyant in the wake of Wednesday’s data.

Canadian Dollar gains kept GBP/CAD under pressure around 1.66 and close to its lowest level since March 2020 on Wednesday, although there’s a chance that Sterling would be in for some temporary relief later in the session if the pending Fed policy decision happens to boost the U.S. Dollar.

“We don't think that today's FOMC will be a big market mover. Setting aside all things geopolitical, our base case scenario is that the USD fades slightly lower as the Fed comes in roughly as expected with no hawkish surprises. By slightly, we'd say something like 0.2% down for the Bloomberg USD index of maybe 30-40 pips for USDCAD,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

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“This is under the assumption that the Fed raises its range for the base rate by 25bps, communicates that balance sheet reduction will begin over the summer with Powell repeating the Fed's willingness to raise rates in 50bp increments and do whatever else is necessary to bring inflation under control. These steps are all now baked into the cake,” Anderson said in a Wednesday research briefing.

The Pound to Canadian Dollar rate would, however, potentially be vulnerable to further declines and a dip beneath the 1.66 handle in the event that USD/CAD falls in the wake of Wednesday’s Fed decision given, in part, that the two often demonstrate a positive correlation.

However, and in any event the Pound to Canadian Dollar rate also faces downside risks stemming from this Thursday’s Bank of England interest rate decision and policy statement, which could potentially include language that dampens market expectations for Bank Rate later this year.

“Had the war not erupted, there would have been decent odds of a 50bps hike this week from the BoE, but the high degree of uncertainty now makes such a move on Thursday highly unlikely,” says Shaun Osborne, chief FX strategist at Scotiabank.

Above: Pound to Canadian Dollar rate shown at daily intervals alongside USD/CAD.