This morning’s Consumer Price Index Report showed that US inflation cooled to 4.9% in April, slightly lower than the expected 5%. The good news is that this marks the 10th consecutive decline, but the bad news is that inflation remains stubbornly high and significantly far from the Federal Reserve’s target rate of 2%.
Overall, the markets are interpreting this as sufficient data to allow the Federal Reserve (Fed) to hold rates in place at its next meeting. Central banks raise interest rates to slow down the economy, implementing tighter financial conditions such as higher borrowing costs, lower stock prices, and in the case of the Fed, a stronger US dollar. If inflation is cooling, even if slowly, the Fed is less likely to raise rates, and the US dollar is less likely to appreciate compared to other currencies, such as the Canadian dollar.
As a result, the Canadian dollar has strengthened by about ¼ of a penny against the US dollar. The Canadian dollar is currently trading at 1.3397. Some FX analysts are suggesting that anything below 1.3350 presents a good opportunity to buy US dollars (converting CAD to USD). We agree with this assessment, especially if you regularly purchase US dollars. However, if US debt ceiling talks make progress or come to a head, the Canadian dollar has even more room to strengthen. On the other hand, those selling US dollars should note that time is not on their side.
