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.
Rising inflation hurts the Canadian dollar in two ways. Firstly, it makes the Fed’s path to cutting interest rates more difficult and hazy, resulting in investors retreating back to low-risk assets such as the US dollar and US Treasury bills. Secondly, it hampers the export-driven Canadian economy by depressing global trade and economic activity.
With no Canadian economic data of note this week, the USD/CAD pairing will continue to be driven by market sentiment. We continue to see the Canadian dollar sliding in the short term and view this as an excellent time for US Dollar sellers to take advantage.
The Canadian dollar is currently trading at 1.3395 CAD against the US Dollar.
