Canadian Dollar increases in value after the release of inflation data
Jul 20, 2021
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Following the publication of positive inflation statistics, the Canadian dollar gained versus the majority of its rivals. The Canadian consumer price index increased 0.5 percent in May, above expectations of 0.4 percent. The core CPI (excluding energy and food prices) increased 0.4 percent in May, compared to 0.5 percent the previous month.The US Federal Reserve will finish its meeting later today to deliberate on monetary policy and offer clarification on the future of monetary policy in the US, with the interest rate expected to remain steady between 0.0 percent to 0.25 percent. This follows the recent dispute about the growth in the US inflation rate, which affects the pricing of products and services.
The Canadian currency gained ground versus the US dollar, with the CAD/USD rate rising by 0.2 percent. The Canadian dollar is anticipated to rise by up to 0.6 percent by the end of the week.
Despite the fact that Canadian inflation rose by 3.4 percent this month, investors are not as anxious about the country's inflation as they were in prior months. This is because investors are looking at domestic retail sales data, which indicates significant month-to-month improvement. The Canadian dollar is on its way to a six-year high.
Retail sales in Canada increased by 3.6 percent last month, well above Statistics Canada's prior forecast of 2.3 percent. Sales in some regions of Canada were projected to fall by about 5.1 percent as a result of the new COVID-19 limitations. That hasn't been the case thus far, which is why the Canadian currency is strengthening even as inflation rises.
Gas prices in Canada are worth keeping an eye on since they have risen by 62.5 percent since last year. Prices at the pump were at their lowest in 11 years in April of last year, and the climb since then has been the highest ever recorded for petrol prices in Canada.
CAD/USD Investors are also looking at the Canadian housing sector, which economists believe is in such disrepair that it exposes the country to an economic shock, owing in part to high levels of family debt.
Meanwhile, in the United States, oil prices have risen 1.9 percent, indicating a bullish trend and reaching a 6-week high.
The US dollar fell Wednesday, reaching its lowest level in four months and performing poorly versus a number of other currencies.
On Wednesday, the Canadian currency gained versus the US dollar and all other G10 currencies as oil prices increased and speculators predicted that the Bank of Canada would be more responsive to rising inflation than the Federal Reserve. Consumer prices in the United States rose by the highest in nearly 12 years in April, as brisk demand in a recovering economy pressed up against supply restrictions. In addition to that, according to the Canadian Forex trading brokers, the Bank of Canada is expected to be "far more sensitive" to increasing inflation than the Fed. Last August, the Fed adopted a new monetary policy strategy and reduced bond purchases, making it the first large central bank to reduce pandemic-era stimulus initiatives.
Higher prices for certain of Canada's commodities, such as oil, have been a key source of inflation. Crude oil futures in the United States were up 1.7 percent at $66.40 a barrel on evidence of a quick economic rebound and optimistic projections for energy consumption. Canadian government bond rates rose throughout the curve, mirroring the rise in US Treasury yields.
The Canadian dollar gained strength with the announcement of inflation statistics. According to Statistics Canada, Canada's annual inflation rate more than doubled to 2.2 percent in March. The central bank suggested that economic slack will likely be absorbed sooner than originally anticipated.
Previously, the Bank of Canada predicted that it would be 2023 before inflation returned to its objective of 2%. The central bank said on Tuesday that it will take place in the second half of next year. Meanwhile, the bank predicted that inflation will temporarily exceed its objective.
According to Statscan, a portion of the March price increase is attributable to a statistical impact induced by a steep slowdown last year during the coronavirus epidemic.
As predicted, the bank kept its main overnight interest rate at a historic low of 0.25 percent.
Surveyed economists predicted that the annual rate would climb to 2.3 percent in March, up from 1.1 percent in February. Energy costs up 19.1 percent year on year, while inflation excluding fuel and food was 0.9 percent.
"The apparent rise is primarily an energy story, as predicted, but there are some hints that fundamental constraints are beginning to show up," said Nathan Janzen, senior economist at the Royal Bank of Canada.
"The Bank of Canada's basic content also rose on the month, with two of them exceeding the Bank of Canada's midpoint 2 percent inflation target," Janzen added.
CPI common, which the central bank refers to as the strongest indicator of the economy's underperformance, was 1.5 percent, slightly higher than the 1.4 percent predicted by economists.
CPI median increased to 2.1 percent in March, up from 2.0 percent in February, while CPI trims up to 2.2 percent in March, up from a revised 2.0 percent in February.
However, according to Derek Holt, vice president of capital markets economics at Scotiabank, the yearly rate is not exclusively driven by a statistical effect.
"This isn't just a result of the base impact; it's really amazing resilience in terms of underlying inflation pressures," he added.
The bank now forecasts Canada's economies to expand 6.5 percent in 2021, up from 4.0 percent in January, with real GDP growth of 3.7 percent in 2022, down from 4.8 percent before.
Following the statement by the Bank of Canada, the Canadian dollar rose 0.9 percent to 1.2499 to the greenback, or 80.01 US cents, its highest level since last June.