USD/CAD Rally To Persist If US CPI Indicates Sticky Inflation

Canadian Dollar Talking Points

USD/CAD rallies to a fresh monthly high (1.2985) following the larger-than-expected rise in US Non-Farm Payrolls (NFP), and the update to the Consumer Price Index (CPI) may sway the exchange rate as the Federal Reserve struggles to reduce inflation.


Fundamental Forecast For Canadian Dollar: Bearish

The upbeat NFP report along with the 30.6K contraction in Canada Employment may keep USD/CAD afloat over the coming days as the data prints feed into the monetary policy outlook, and the Bank of Canada (BoC) may come under pressure to adjust its approach after deciding to “front-load the path to higher interest rates.”

Signs of a weakening labor market may push the BoC to normalize monetary policy at a slower pace as Governor Tiff Macklem and Co. acknowledge that “interest rates will need to rise further,” and waning expectations for another 100bp rate hike may produce headwinds for the Canadian Dollar as the “pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.”

USD/CAD Rally to Persist If US CPI Indicates Sticky Inflation

In contrast, the Federal Open Market Committee (FOMC) may step up its effort the combat inflation amid the ongoing improvement in the US labor market, and it remains to be seen if the update to the CPI will influence the near-term outlook for USD/CAD as the headline reading is expected to narrow to 8.7% from 9.1% per annum in June, while the core reading is projected to increase to 6.1% from 5.9% per annum during the same period.

A batch of mixed data prints may generate a kneejerk reaction in USD/CAD as Chairman Jerome Powell recognizes that “it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” but another unexpected uptick in US consumer prices may generate a bullish reaction in the Greenback as it puts pressure on the FOMC to carry out a highly restrictive policy.

With that said, the US Dollar may continue to outperform its Canadian counterpart as the upbeat US NFP report raises the scope for another 75bp Fed rate hike, and USD/CAD may continue to retrace the decline from the July high (1.3224) if the CPI indicates persist inflation.

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