Canada will be next to report its January CPI inflation readings on Wednesday at 13:30 GMT. Forecasts point to some stabilization but given the upside surprise in other major economies, Canada may not be an exception. Investors are certain the central bank will take its tightening phase to the next level of rate hikes in the coming months, though how aggressively it could respond is still unknown and the new inflation update may add new information to the puzzle, likely helping the loonie to steal some ground against its US cousin. Retail sales will be the next highlight on Friday at the same time.
Not a rate hike but multiple rate hikes
The Bank of Canada surprisingly held its benchmark interest rate stable during its January meeting in the face of omicron infections but removed its commitment to hold borrowing costs at the effective lower boundary following the termination of its bond program in October and the switch to the reinvestment phase. Traders are now blindly convinced that the central bank will deliver 25-bps rate hikes at each of its six meetings to drive rates up to 1.75% by October 2022. Besides, BoC governor Tiff Macklem came to confirm last week that “the rising path in rates is not one increase, it’s multiple increases”.
Can CPI data break the loonie’s range-bound trading?
With investors already set up for the tightening phase, the question now comes down to Wednesday’s CPI inflation readings and how they could affect market expectations and therefore the Canadian dollar, which has been trapped within the 1.2800 – 1.2665 region so far this month despite the spike in oil prices.
Expectations are for the headline CPI rate to keep a steady pace at the three-decade high of 4.8% year-on-year, while the monthly figure is projected to return to growth, rising by 0.6% after contracting by 0.1% in the preceding month. If the data match forecasts, the loonie could barely react even if the rate hike scenario still remains on the table. On the other hand, an upside surprise similar to what the US and the Eurozone have experienced could bode well for the currency if traders start to bake in more aggressive rate hike increases as in the case of the Fed.
Of course, unlike January’s US jobs data, the Canadian employment report was a disappointment, showing a job loss of 200k and a higher unemployment rate at 6.5%. Friday’s retail sales data for December could be bleak as well, showing the largest decline since July 2021. Yet the Canadian economy and particularly the labor market has proved that any slowdown following previous pandemic waves was only a bump in the road with some inflationary consequences.
USD/CAD
Therefore, traders may not easily dash their rate hike expectations, but they will probably wait to see whether the upcoming CPI inflation figures can support steeper rate increases before they drive dollar/loonie below the 1.2700 level and towards the range’s lower boundary of 1.2665. If the latter fails to hold, the next stop could be around 1.2630, where any violation is expected to trigger a sharper decline towards the 1.2500 handle.
In the event the data come in below expectations, the pair could face little volatility. Nevertheless, traders would keep a close eye for any bullish breakouts above the 1.2800 – 1.2830 resistance band.
