The Canadian dollar has posted considerable gains in Friday’s North American session. Currently, USD/CAD is trading at 1.2679, down 0.50% on the day. On the release front, US CPI and Core CPI posted weak gains of 0.1%, shy of their estimates of 0.2%. There are no Canadian events on the schedule. Later in the day, we’ll hear from two FMOC members, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari.
More US inflation numbers, more disappointment for the markets. Consumer Price Index reports in June underscored a soft inflation picture, as both CPI and Core CPI showed negligible gains of 0.1%. This follows a 0.1% decline in the Producer Price Index for June. The persistently soft inflation indicators may hamper plans by the Federal Reserve to raise rates, as some FOMC members continue to advocate against a rate increase until inflation climbs closer to the Fed’s inflation target of 2%. However, inflation is not showing any signs of moving higher, which means that a December rate hike remains very much in doubt.
Global markets remain jittery over rising tensions between North Korea and the US. With the war of words escalating between the two countries, global markets are down, as investors have dumped shares in favor of safe-haven assets, such as the Japanese yen and gold. North Korea has vowed to retaliate over new sanctions imposed by Washington and has threatened to attack Guam, which is a major US military base. President Trump and North Korean President Kim Jong-un are on a possible collision course, which has caused alarm in South Korea and Japan, strong allies of the US. The present situation is being compared to the Cuban Missile crisis, and although the likelihood of actual hostilities breaking out remains small, the crisis has reached levels where the markets cannot ignore it.
In contrast to the uncertainty over the Fed’s monetary plans, the Bank of Canada is leaning towards further tightening, possibly before the end of 2017. The bank raised interest rates in July and the odds of a rate increase in October are at 78 percent. In May, annualized GDP was up 4.6%, and the labor market continues to produce jobs. The increase in oil prices has revived the economy has also pushed the Canadian dollar higher. At the same time, similar to the situation in the US, inflation remains subdued, despite a stronger economy and an improving labor market. The lack of inflation could cause the Federal Reserve to abandon plans for another rate hike this year, and this could also lead to the BoC deciding to delay a rate hike until inflation moves higher.