The Canadian Dollar Declines Against the US Dollar: Unexpected Inflation and Political Contradictions Shake Markets
The Canadian dollar fell to its weakest level since early November on slowing inflation and expectations of a BoC rate cut. Strong data in the US, on the other hand, pushed forward the Fed's rate hike plans, pushing the USD higher.
The Canadian dollar fell to 1.38 against the US dollar in April, reaching its weakest level since early November. This decline was driven by the unexpected slowdown in Canadian inflation and the contrasting forecasts in the markets in anticipation of the upcoming interest rate cut by the Federal Reserve (BoC).
Canada’s Inflation Falls Short of Expectations
Annual inflation rate in Canada was realized as 2.9% in March, below market expectations. This rate was also below February’s 3.1%. The trimmed average and median core rates, which are used by the BoC as underlying inflation indicators for monetary policy decisions, were also well below expectations. These results increased investors’ bets that the BoC will cut interest rates at its June meeting.
Weak Sentinals Despite Strong GDP
Although the Canadian economy is showing strong GDP growth overall, recent data points to a significant increase in the unemployment rate. Moreover, purchasing managers’ index (PMI) figures have consistently pointed to contraction. This raises concerns that the economy is starting to weaken.
Hot US Data Pushes Fed’s Rate Hike Plans Forward
On the other hand, recent economic indicators in the US, such as an unexpected drop in applications for unemployment benefits and strong manufacturing data, have been quite favorable. This delays the US Federal Reserve’s (Fed) interest rate cut plans, pushing the US dollar higher.
Markets On Hold: Where Will the Canadian Dollar Go?
Contrasting economic indicators and monetary policy expectations in Canada and the US have left investors uncertain about the future of the Canadian dollar. In the short term, the Canadian dollar may be volatile amid expectations of a BoC rate cut and hot data in the US. In the long run, the course of the Canadian economy and the interest rate policies of the two central banks will be the main factors that will determine the direction of the Canadian dollar.
