CAD bulls received a boost on Friday as the latest inflation data for Canada came in stronger than expected. December CPI rose 2% year on year, above both the prior and expected rate of 1.7%.
Given the roughly 40% collapse in oil prices from last year’s highs, the market has been looking for a weaker figure, and as such, the 2% result caught the market by surprise. Core inflation, which strips out energy and food costs and is the bank’s main measure of inflation, remained unchanged at 1.9%, just below the Bank of Canada’s 2% target.
Transitory Factors In Play
The breakdown of the data shows that the majority of the increase over December was as a result of one-off factors linked to the holiday period. Components such as travel tours and transportation, notably volatile components, rose 6.6% and 21.7% respectively, helping to offset the weakness seen in gasoline prices.
Could BOC Hike As Early As Q2?
While the energy prices declines were offset over December, any further weakness is likely to translate much more directly into lower inflation readings, keeping the BOC side-lined.
While the BOC will, of course, be happy with the December reading, it will be watching the January figure closely to see how inflation fares once those transitory holiday effects have been removed.
If the upward trend continues, however, we could see the bank moving back into a hiking phase as early as April, which is the next full monetary policy report to be published. However, given the pause in the Fed’s tightening program, the BOC will likely wait for the Fed to make the first move again before lifting domestic rates.
The decline in USDCAD has taken price back down below the 1.3377 level support. Price is now retesting the broken bearish trend line from 2017 highs which have held as support for now. While price remains above the rising trend line from 2012 lows, focus remains on further upside with structural resistance at the 1.3786 the next key level to watch.