In December, Canada’s inflation rose annually to 2.4%, slightly exceeding market expectations, following a 2.2% increase in November. Monthly inflation, however, dropped by 0.2%.<\/p>\n
The Bank of Canada’s core inflation, excluding volatile items such as food and energy, showed a 2.8% annual rise and a 0.4% monthly decrease. Other inflation measures indicated underlying price pressures remaining consistent, with Common CPI at 2.8%, Trimmed CPI at 2.7%, and Median CPI at 2.5%.<\/p>\n
An increase in Consumer Price Index (CPI) was driven by the end of a temporary tax break on December 14, 2024. Gasoline prices fell year-over-year in December, with overall CPI excluding gasoline increasing by 3.0%.<\/p>\n
Following the inflation data release, the Canadian Dollar strengthened against major currencies, experiencing gains, especially against the US Dollar. As the Canadian CPI figures were anticipated to drop by 0.3% monthly, there is unlikely to be a lasting impact on USD\/CAD volatility unless there is a deviation from market predictions.<\/p>\n
The Bank of Canada is monitoring inflation closely, aiming to maintain it between 1-3%. High inflation could result in higher interest rates which typically strengthens a currency, while low inflation could have the opposite impact.<\/p>\n
With today’s inflation data coming in hotter than expected at 2.4%, the market’s assumption of a patient Bank of Canada (BoC) is now being challenged. The core measure at 2.8% is particularly telling, suggesting underlying price pressures are not fading as quickly as we thought. This effectively takes any near-term BoC rate cuts off the table and forces us to reconsider the possibility of a more hawkish stance.<\/p>\n
For derivatives traders, this means the implied volatility on Canadian dollar options is likely to rise, especially around the upcoming January 28th BoC meeting. We should consider buying USD\/CAD put options to position for further Canadian dollar strength or selling out-of-the-money call options to collect premium on the belief that the pair’s upside is now capped. This surprise data makes owning downside exposure in USD\/CAD a prudent move for the next few weeks.<\/p>\n
This situation is magnified when we look at the policy divergence with the United States, where the Federal Reserve has been signaling a potential easing cycle. This Canadian inflation report strengthens the case for a widening interest rate differential in favour of Canada, a fundamental driver for a stronger CAD. We saw a similar dynamic play out in mid-2023 when a resilient Canadian economy kept the BoC on a tightening path longer than many expected.<\/p>\n
Looking at the broader Canadian economy, the Bank of Canada has held its policy rate firm at 5.0% since last summer, justified by this kind of persistent inflation. Even with recent Statistics Canada figures showing GDP growth cooled to an annualized rate of just 0.5% in the third quarter of 2025, today\u2019s inflation numbers give the BoC cover to prioritize its price stability mandate. This resilience means the central bank can afford to wait and see more data before even thinking about rate cuts.<\/p>\n
Considering the supportive backdrop from stable energy prices, with Western Canadian Select crude holding firm, the path of least resistance for the Canadian dollar appears to be upward. We should view the current USD\/CAD level below 1.3900 as a new, lower range rather than a temporary dip. Therefore, layering into bearish positions on any bounce in USD\/CAD, perhaps using futures contracts, seems like a logical response over the coming weeks.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Canada\u2019s inflation rose to 2.4% in December; core measures remain steady, Canadian Dollar gains strength.<\/p>\n","protected":false},"author":62,"featured_media":16965,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-39544","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/39544","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=39544"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/39544\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/16965"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=39544"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=39544"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=39544"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}