Canadian Dollar Calm Ahead of Inflation Data

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The Canadian dollar is steady on Tuesday, after starting the week with gains of 0.48% against the US dollar. In the European session, USD/CAD is trading at 1.3765, down 0.09% on the day. It’s a busy mid-week for Canadian events, with the August inflation report later today and the Bank of Canada decision on Wednesday.

Canada’s CPI expected to climb to 2%

Headline CPI is expected to rise to 2% in August, up from 1.7% in July. Two key core inflation indicators are projected to post an average of 3.05% unchanged from July.

The Bank of Canada is widely expected to lower rates at Wednesday’s meeting, after holding rates for three consecutive meetings. The markets are expecting a quarter-point reduction which would lower the policy rate to 2.75%, its lowest level since July 2022.

The economy is sending out distress signals. GDP in the second quarter contracted by 1.6% and the labor market shed 100 thousand jobs in July and August. The unemployment rate rose to 7.1% from 6.9%, a three-year high.

The weak data strongly supports the case for a rate cut but underlying inflation is well above the BoC’s 2% target, which is likely the reason that the central bank has held off from lowering rates. With the labor market deteriorating, the BoC will likely respond with a rate cut in order to stop the bleeding. Underlying inflation remains higher than the BoC wants to see, but barring a huge increase in inflation, a rate cut appears a done deal.

The BoC remains concerned about the US-Canada trade war, which has created a lot of uncertainty with regard to the direction of growth and inflation. However, with the announcement in August that Canada would remove counter-tariffs on US goods covered by the Canada-US-Mexico ageement, the BoC is likely to be more comfortable lowering rates.