Inflation in the US was down again in January but came in higher than what market watchers had expected. According to the US Labor Department, consumer prices rose 3.1% in January compared to 3.4% in December. Markets had anticipated the January inflation number to be at 2.9%. The higher-than-expected inflation number put investors in a sour mood and kick-started the latest round of risk-off trading. Stocks fell, Treasury yields rose, and the US Dollar gained against the Canadian dollar.
The Canadian dollar has lost about half a cent against the USD Friday overnight and into Monday morning after reaching a one-week high to end last week on strong Canadian employment numbers. The Canadian dollar was drifting higher throughout the day on improving crude oil prices after OPEC announced that they are ready to adjust prices at any time, which is code for cutting production to increase prices.
The much-anticipated Canadian January jobs data came in at just over 37,000, more than doubling the 15,000 figure market analysts had expected. This helped the Canadian dollar gain approximately 0.25 of a penny against the US dollar. However, because the vast majority of the gains were in the form of part-time employment, accounting for approximately 48,000 jobs, while full-time employment actually fell by just over 11,000 jobs, the USD/CAD pairing quickly stabilized at a new weekly high (CAD/USD low).
The Canadian dollar remained steady against the US Dollar on Thursday, touching a weekly high as investors await the Canadian employment report expected on Friday morning. Economists are expecting the Canadian economy to have added 15,000 jobs in January. A surprise on the upside with more than 15,000 jobs added could lead the Bank of Canada (BoC) to hold off on any rate cuts. However, if the job numbers come in below expectations and disappoint the market, the Canadian dollar could weaken against the US dollar. This would be seen as a further indication for the BoC that rate cuts are imminent, especially compared to the more stable situation in the US.
While Wednesday ‘s decision to hold the Bank of Canada’s key overnight rate at 5% was widely expected, you could argue that the BoC’s shift in tone and messaging was somewhat of a surprise. The BoC acknowledges that the discussion has now ‘shifted’ from whether more hikes are needed to how long to keep rates elevated. However, this still disappointed markets, and the Canadian dollar weakened on the news, falling to a six-week low against the US dollar. In essence, the markets were of the opinion that the BoC will cause unnecessary damage to the Canadian economy by waiting too long to cut rates. The range of predictions for the first rate cut ranges between April and June of 2024. The BoC’s new inflation forecast sees inflation at 3% for the first half of 2024, before falling to 2.5% by the end of the year and returning to the 2% target in 2025.
The Canadian dollar attempted to muster a rebound against the US dollar overnight but quickly sputtered and gave up its modest gains after Canadian retail sales data for November registered weaker than expected on Friday morning.
The Canadian dollar continued its slide against the US dollar from Tuesday overnight into Wednesday morning, hitting a new one-month low. So far in 2024, the Canadian dollar has lost 3 ½ cents against the US dollar. However, it’s important to note that the Canadian dollar has actually held steady or even gained against most other major currencies. The slide in the USD/CAD price is largely attributed to broad US dollar strength, which, in turn, is being driven by the ongoing challenge of reducing inflation back to the coveted 2% target desired by most central banks.
According to a Statistics Canada report released on Tuesday, the Canadian Consumer Price Index (CPI) increased to an annual rate of 3.4 percent in December, up from 3.1 percent in November. Higher-than-expected inflation has been a common theme worldwide in January. Recent comments from European Central Bank officials, indicating that they do not anticipate rate cuts until late 2024, if at all, combined with last week’s higher-than-expected U.S. inflation figures, have moderated global expectations for lower interest rates. This development has been a significant factor driving investors towards the safety of the U.S. dollar, leading to its broad strengthening so far in 2024. This trend is evident in both the U.S. dollar index and the USD/CAD pairing, which have reached new monthly highs (corresponding to CAD/USD lows).
The Canadian dollar stabilized on Friday, gaining slightly against the USD, but it lost ground over the week against most major currencies, including the US dollar. Thursday’s higher-than-expected US consumer price index (CPI) number, a key indicator of inflation, along with the US-led coalition attack on Houthi bases, have put investors in a defensive position and contributed to the already negative market sentiment.
Index (CPI) showed inflation edging higher, reversing a trend of rapid deceleration seen in 2023. The CPI increased to 3.4% compared to November’s 3.1%, serving as a rude reminder to investors that the last mile in the fight to lower inflation to the Fed’s target of 2% is still ongoing. Perhaps more importantly, it gives the edge to the Fed in the game of chicken that has the markets betting big on rate cuts, while central banks continue signaling that rates may stay elevated for the foreseeable future.
