Canadian Dollar Crashes on Missed Inflation Brings Bank of Canada Closer to Finish Line

  • Canadian inflation down by all measures
  • Heralds end Bank of Canada rambling cycle
  • But deprives the CAD of support via the tariff channel

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The Canadian dollar fell in the wake of domestic inflation data showing prices rose less than expected in August, underscoring the view that the Bank of Canada will be among the first major central banks to complete its cycle of rise.

The Canadian dollar fell against the majority of its major peers on Tuesday after headline CPI inflation came in at -0.3% month-on-month in August, disappointing relative to market expectations. of -0.1% and the positive July result of 0.1%.

In the year to August, CPI inflation rose 7.0%, below the 7.3% market expectation and below the 7.6% expected by the market. July.

Core inflation – which excludes food and energy costs – remained unchanged during the month, after a more pronounced rate of 0.5% in July.

Canadian inflation

All of the Bank of Canada’s preferred inflation measures showed a deceleration: Core CPI fell to 5.7% from 6.0%, the median fell to 4.8% from 4, 9%, and the reduced value dropped to 5.2% from 5.4%.

“We believe it is far too early for the Bank to proclaim ‘Mission Accomplished’. But with interest rate sensitive sectors of the economy rapidly slowing and employment contracting in recent months, a sustained deceleration in price growth could prompt the Bank of Canada to take an extended pause after the October announcement,” said Randall Bartlett, senior director of the Canadian economy at Desjardins Bank.

“While headline inflation remains well above the Bank of Canada’s target, meaning further rate hikes are likely, a clearer gap appears to be opening between inflation trends in the Canada and the United States, which should lead to a lower peak from the Bank of Canada than the Federal Reserve,” says CIBC economist Andrew Grantham.

The divergence in expectations was reflected in a significant 0.75% advance in the exchange rate between the US dollar and the Canadian dollar to 1.3345.

The exchange rate between the pound and the Canadian dollar meanwhile rose 0.40% to 1.5213, bringing money transfer rates to bank accounts to around 1.4787 and payment provider rates specialized at 1.5167.

The inflation data reinforces growing expectations that the Bank of Canada is nearing the end of its rate hike cycle, which in turn implies that Canadian bond yields face limited upside.

This would potentially deprive the Canadian dollar – one of the biggest carriers of 2022 – of support via the rate channel going forward.

“Bond yields fell immediately after the release, but had begun to undo some of that movement later in the morning. The Canadian dollar, however, weakened against its US counterpart, with this trend continuing even when yields have started to level off, as investors reassess their expectations for where the peak in interest rates will be in Canada versus the United States,” Grantham said.

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Looking at the details, food prices in Canada are up 9.8% from a year ago, making it the highest in more than four decades.

But the brake on energy prices was the main driver of the inflation basket thanks to a drop of 6.5% during the month of August.

Looking ahead, RBC Bank economist Claire Fan says flattening demand – according to RBC’s own card spend tracker – looks likely to further limit the pace of growth in physical commodity prices in the US. coming.

“Meanwhile, growth in the prices of services, particularly those related to leisure and travel, are likely to remain higher for longer, supporting the strength of underlying inflation which we expect will not peak until later in the fourth quarter of this year,” she says.

RBC expects an additional 75 basis points of hikes over the rest of 2022, which is well below what is expected from the Fed (190 bps), Bank of England (194 bps) and Bank Central European (130 bp).

In fact, only the Bank of Japan is expected to offer less than the BoC going forward.

“Further increases are coming, but probably at a slower pace,” said James Knightley, chief international economist at ING.

A combination of falling oil prices, troubled global equity markets and the impending completion of the Bank of Canada rate hike cycle could provide potential headwinds for the Canadian dollar in the coming weeks.

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