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.
This latest inflation measure reinforced the Fed’s perspective and allows the Fed to kick the can down the road. The latest expectation for the first rate cut is now in June. Investors are concerned that the Canadian economy and Canadian consumers will have a more difficult time tolerating higher interest rates for a longer period of time compared to their American counterparts. This suggests that the Bank of Canada will likely be forced to cut rates before the Fed, and if that’s the case, there will be a widening differential in the interest rates between Canada and the US. This would push investors out of the Canadian dollar and into the US Dollar.
The Canadian dollar is currently trading at 1.3580 CAD against the US Dollar.
