USD/CAD catches a bid ahead of Canadian inflation report

There was some well-grounded excitement leading into last month’s inflation report that the BOC could begin cutting interest rates in June. Yet it was the kind of report that one could see what they wanted. Annual rates of inflation continued to soften to appease doves, seeing core CPI y/y reaching the BOC’s 2% target for the first time in three years, median CPI slowing to 2.8% y/y within the BOC’s 1-3% band, and trimmed mean slowing to 3.1%. Yet on a monthly basis, core CPI rose 0.5% m/m and CPI was up 0.6%. The bump in the road on the monthly gauges were a fly in the ointment, but perhaps could have been ignored had employment data stalled. Spoiler alert; it didn’t.

Instead, employment blew past expectations by adding 90.4k jobs compared with the 20.9k expected and -2.2k prior. Unemployment also remained steady at 6.1% instead of rising to 6.2% as forecast. Perhaps hopes of a June cut may still be alive had monthly CPI reads not shot higher, but here we are. And with a key set of inflation figures released later today for Canada, I am now wondering if CPI could surprise to the upside again and strengthen the Canadian dollar.

As a reminder, traders remained heavily short CAD futures according to last week’s COT report, which is accurate up to Tuesday 14^th May close. And should today’s inflation report come in hot, there is a risk of traders covering short CAD positions and sending USD/CAD lower. Naturally the inverse is true. So if monthly inflation data is to drop notably, it could deem last month’s figures as a blip and take some of the sting out of the hot employment report. But for us to expect a BOC June rate cut to return, surely we’d need some particularly soft CPI figures later today.

As things stand:

• Trimmed mean CPI is forecast to dip to 2.9% y/y, which would take it within the 1-3% target band for the first time since June 2021
• Median CPI is forecast to slow to 2.7% y/y
• But what we really need to see is CPI and core CPI m/m come in at 0.2% m/m and below, to keep feint hopes of a June rate cut alive

USD/CAD technical analysis:

Last week’s low found support around the 1.36 handle and value-area high of the prior rally. A series of lower wicks on the daily chart also suggest this area as strong support. And with the US dollar drifting higher towards 105 ahead of the FOMC minutes, perhaps the path of least resistance for USD/CAD is higher. At least initially.

The 4-hour chart shows a double bottom formed around 1.36 and momentum is pushing higher. RSI (14) is now above 50 to show positive momentum after forming a bullish divergence last week. Today’s view is to see dips within the 1.3607/20 range for a move towards 1.3660.

Beyond that, it is likely down to the US dollar performance as to whether USD/CAD might continue higher or roll over and have another crack at breaking 1.36 support. But if inflation data comes in uncomfortably hot, that could occur sooner than later.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge