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


Canadian Dollar Talking Points

USD/CAD rallies to a contemporary month-to-month excessive (1.2985) following the larger-than-expected rise in US Non-Farm Payrolls (NFP), and the replace to the Consumer Price Index (CPI) could sway the change price because the Federal Reserve struggles to cut back inflation.

Fundamental Forecast for Canadian Dollar: Bearish

The upbeat NFP report together with the 30.6K contraction in Canada Employment could hold USD/CAD afloat over the approaching days as the information prints feed into the financial coverage outlook, and the Bank of Canada (BoC) could come beneath strain to regulate its method after deciding to “front-load the path to higher interest rates.”

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

In distinction, the Federal Open Market Committee (FOMC) could step up its effort the fight inflation amid the continuing enchancment within the US labor market, and it stays to be seen if the replace to the CPI will affect the near-term outlook for USD/CAD because the headline studying is anticipated to slender to 8.7% from 9.1% each year in June, whereas the core studying is projected to enhance to 6.1% from 5.9% each year throughout the identical interval.

A batch of combined knowledge prints could generate a kneejerk response in USD/CAD as Chairman Jerome Powellacknowledges 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,” however one other surprising uptick in US client costs could generate a bullish response within the Greenback because it places strain on the FOMC to perform a extremely restrictive coverage.

With that stated, the U Dollar could proceed to outperform its Canadian counterpart because the upbeat US NFP report raises the scope for one more 75bp Fed price hike, and USD/CAD could proceed to retrace the decline from the July excessive (1.3224) if the CPI signifies persist inflation.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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