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The Canadian Dollar (CAD) has strengthened against the US Dollar (USD). USD/CAD fell below 1.3900 as Canadian inflation surpassed expectations, contrasting with a weaker USD.
Canada’s Consumer Price Index (CPI) rose 1.7% year-on-year in April, down from March’s 2.9%. However, the BoC core CPI accelerated to 2.5% year-on-year, reflecting increased underlying price pressure, despite headline inflation decline.
Impact Of Oil Prices
Oil prices contributed to the lower headline inflation, decreasing 12.7% year-on-year in April. The Bank of Canada (BoC) is under pressure to maintain its current interest rate due to mixed inflation data.
The US Dollar Index (DXY) dropped below 100.00, showing a 1.2% decline this week. This stems from Moody’s downgrading US credit and a bleak economic outlook by the Federal Reserve.
Upcoming US Purchasing Managers Index (PMI) and Canada’s Retail Sales data are crucial events traders are watching. The BoC utilises interest rate adjustments and quantitative easing or tightening to manage inflation and strengthen the CAD.
Importance Of Market Research
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The Canadian Dollar’s jump has largely been driven by firmer price growth beneath the surface, while at first glance, the headline inflation data looked less compelling. Many might have initially viewed April’s drop in Canada’s top-line CPI from 2.9% to 1.7% as a cooling signal, prompting thoughts of potential policy loosening from the central bank. But scratching beyond the surface paints a different picture—BoC’s preferred core measures actually ticked higher to 2.5%, suggesting that price pressures are becoming stickier in parts of the economy the Bank cares most about.
Energy prices, particularly oil, played a heavy role in dragging headline CPI lower. A year-on-year drop of over 12% in oil is no small thing, especially considering Canada’s sensitivity to commodity fluctuations. But such softness in energy may not persist indefinitely, and it shouldn’t be seen as the only driver anchoring inflation down. With wage gains in steady territory and housing-related costs still firm, it’s worth recognising that underlying demand might still be too strong to justify a cut just yet.
Meanwhile, across the border, the US Dollar has been facing its own challenges. The loss of momentum in the DXY tells part of the story, dropping past the psychologically important 100.00 level. A large part of that stems from deepening concerns about the US growth profile, illustrated by both Moody’s deterioration in credit sentiment and more cautious tones from the Fed. Market participants—ourselves included—are watching the disconnect emerge more clearly: while Canada’s inflation picture is less straightforward, the US is leaning toward stagnation, prompting questions about the relative strength of the two economies going forward.
This leads straight into the expectations around policy direction. Rate markets may need to dial back expectations of quick easing from the Bank of Canada. The strong response in CAD following the inflation surprise highlights how traders are attuned to inflation dynamics—but more importantly, to changes in central bank tone. If the BoC signals more concern over sticky core inflation, current rate levels might hold for longer than priced in.
The upcoming period will present decision points, not only due to incoming Canadian Retail Sales numbers but also because of how the US economy continues to shape the broader market tone. Closely tracking PMI figures from the US will help paint a clearer picture of forward demand and whether the Fed will need to lean further into its cautious stance.
For those pricing options or constructing futures-based strategies, the volatility compression in USD/CAD could offer short-term opportunities. However, assuming continued CAD strength without watching the reaction to key data would be shortsighted. We need to ask whether the market is over-correcting to a single month’s surprise in core CPI. At the moment, rate spreads are slightly in favour of CAD, but that’s conditional on Canadian data continuing to firm.
Any trades reflecting a rebound in USD or decline in CAD must now be built around inflection points in the data, not speculation. Setups expecting a weakening Canadian currency likely require either a sharper-than-expected drop in retail sales or a dovish tilt in Bank of Canada language, neither of which is guaranteed just yet.
As always, it’s worth managing positioning with awareness that momentum-driven moves following headline data can quickly reverse if core metrics send different signals. Affirming that with macro data over the next few weeks will matter more than price action alone. We tend to prefer setups that balance direction with defined risk, especially in a pair where both central banks could be tipping into different phases of their policy cycles.
