Canadian Dollar: Inflation Undershoot Points to Further Downside
- Written by: Gary Howes
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The Canadian Dollar is tipped to stay under pressure following an undershoot in Canadian inflation data.
Canadian CPI inflation dipped below the 2.0% midpoint of the Bank of Canada's target range, reaching 1.9% year-on-year in November.
The figure is consistent with Canada's now-familiar soft economic pulse, which continues to pressure the CAD.
The trim core measure of inflation edged higher to 2.7%, and the median core rose to 2.6%. These core measures are watched closely by the Bank of Canada, and on the face of it, they should signal some caution in anticipating further rate cuts.
But these core readings are being held aloft my mortgage and rental costs (shelter), which are steadily and surely coming down as previous Bank of Canada rate cuts are transmitted.
Following these data, the Pound to Canadian Dollar (GBP/CAD) exchange rate hit a peak at 1.8150 and the U.S. Dollar to Canadian Dollar (USD/CAD) reached 1.4271, its highest since April 2020.
"The Canadian dollar has survived this CPI print without breaking the 1.43 handle as some had worried, but there are still a lot of depreciative drivers right now, with political uncertainty being added to the mix over the past day," says Kyle Chapman, an analyst at Ballinger Group.
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The Bank of Canada cut interest rates by an outsized 50 basis points last week as it tries to stimulate the economy, judging that the battle against inflation has gone their way.
Indeed, there is nothing in today's numbers to question this, thereby underpinning a view the Bank will now be more focussed on how it can stimulate activity.
This spells more rate cuts that can keep Canadian bond yields pressured relative to elsewhere, in turn pressuring CAD.
However, the Bank indicated last week that it sees less haste to cut rates further, judging the rapid descent seen in 2024, which is yet to be felt.
The Bank can therefore slow down the pace, which could mean the pace of CAD decline eases into the early stages of 2025.
"The Bank of Canada cut the overnight rate by 50 bps as expected last week but signalled clearly that further reductions would be more gradual. That’s in line with our outlook, that expects consecutive smaller 25 basis point cuts to the overnight rate down to 2% (below the BoC’s 2.25% to 3.25% estimated neutral range) by July 2025," says Claire Fan, Economist at Royal Bank of Canada.
