- USD/CAD gains momentum as Canada’s headline CPI slowed in December year-over-year, with month-on-month CPI showing deflation.
- Weak Canadian inflation data bolsters expectations of a 50 bps rate cut by the BoC.
- The US plans to implement 25% tariffs on Canada and Mexico starting February 1.
The USD/CAD pair gains traction near 1.4430 during Tuesday’s North American session after Statistics Canada released softer-than-expected inflation data for December. The report revealed that headline inflation rose at an annualized pace of 1.8%, below both the previous reading of 1.9% and market expectations. On a monthly basis, CPI contracted by 0.4%, aligning with forecasts but declining from November’s flat reading.
The weaker inflation figures amplify concerns about inflation falling below the Bank of Canada’s (BoC) 2% target, increasing pressure on the central bank to maintain its policy easing momentum. The BoC has already implemented two consecutive 50 basis point (bps) rate cuts in recent meetings. However, a Reuters poll conducted from January 10–16 indicated a high likelihood that the BoC will opt for a smaller 25 bps rate cut this month, bringing the policy rate down to 3%.
The Canadian Dollar faces additional headwinds as U.S. President Donald Trump announced plans to impose 25% tariffs on Canadian and Mexican imports starting February 1. Furthermore, Trump’s intention to accelerate strategic oil reserve production has weighed on the Loonie, given Canada’s status as a leading oil exporter to the U.S. Higher oil production is expected to lower global prices, reducing foreign inflows to Canada.
Meanwhile, the U.S. Dollar has regained strength on Tuesday after a sharp decline on Monday. Trump confirmed the delay in tariff implementation but refrained from dismissing the possibility, stating, “We are not ready for that yet.” The U.S. Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, climbed above 108.50, adding to USD/CAD’s upward momentum.
