The Canadian Dollar (CAD) has continued to weaken following Tuesday's release of the softer-than-expected January Canadian CPI report. MUFG Bank economists analyze the prospects for the CAD.
Slowing inflation brings forward expectations of BoC rate cut
The publication of the Canadian CPI for January has meant a setback for the CAD. It was reported that headline inflation had started the year on the worse foot, with the annual rate slowing by 0.5 points to 2.9%. The BoC will be calmer considering that core inflation also fell in January. The quarterly core CPI fell 0.3 points to 3.4%, and the average core CPI fell 0.2 points to 3.3%. While the slowdown in core inflation is positive, it remains uncomfortably high for the BoC, which would like to see three- and six-month annualized rates return below 3%.
In Consequently, we continue to expect the BoC to be cautious about signaling imminent rate cuts at its next policy meeting on March 6. However, weaker CPI data has encouraged market participants to more fully trust the BlC to begin cutting rates at the June policy meeting..
In light of these developments, we see scope for Canadian rates market forecasts more than 75 basis points of rate cuts by the end of this year.
These developments have increased the probability that the USD/CAD continues to trade above the 200-day SMA support around 1.3480 in the near term.
Source: Fx Street
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