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Canadian Dollar Showing Strength

The Canadian dollar has edged higher on Friday. In the European session, USD/CAD is trading at 1.3341, down 0.20%. The Canadian dollar is showing some strength lately, having posted only one losing session since January 5th and gaining over 200 points during that time.

US dollar retreats after inflation slows

US inflation declined in December and has de-accelerated for a sixth successive month. Headline CPI fell to 6.5%, down from 7.1% and matching the estimate. Notably, the core rate also slowed, dropping from 6.0% to 5.7% and matching the forecast. From a peak of 9.1% in June, the downtrend is certainly encouraging, although it remains much higher than the Fed’s 2% target. Still, it’s clear that inflation is on the right path as the impact of the Fed’s aggressive tightening cycle is being felt in the economy.

The inflation data came in as expected, but the US dollar retreated against the majors on Thursday, as the markets are hoping that the Fed will pivot on its aggressive rate policy. The Fed, however, hasn’t given any such signals. After the inflation release, Fed member Harkins said that he supports a 25-basis point hike at the February meeting and expects rates to rise “a few more times this year”, with a 25-bp pace being appropriate. This is more hawkish than some of the voices we’re hearing in the markets that are saying the February hike could be a “one and done” that will wrap up the current rate-tightening cycle.

It was a very light data calendar for Canadian events this week, but next week will be busy. Canada releases the BOC Business Outlook Survey on Monday, followed by the December inflation report on Tuesday and retail sales on Friday. These three events will be closely watched by the Bank of Canada and could play a pivotal role in the BOC’s rate decision on January 25th. There is a 70% probability that the BoC will deliver a modest 25-bp increase to kick off 2o23, with a 30% chance of no change.

USD/CAD Technical

  • USD/CAD is testing support at 1.3358. Next, there is support at 1.3271
  • 1.3431 and 1.3522 are the next resistance lines

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