USD/CAD Eyes Inflation Report

• Canada’s inflation expected to ease in May
• The inflation data could be a key factor in BoC’s July rate decision

The Canadian dollar moved higher earlier on Monday but has pared these gains. In the North American session, USD/CAD is trading at 1.3169, down 0.10%. The Canadian dollar has been red-hot against its US counterpart, surging 3% in the month of June.

Canadian inflation expected to ease

Canada releases May inflation numbers on Tuesday, and the markets are expecting inflation to fall after rising slightly in April. Headline inflation is expected to fall to 3.4%, down sharply from the current 4.4%. Core CPI is projected to ease to 3.9%, down slightly from 4.1%.

The Bank of Canada has been fighting a long and tough battle against inflation, and a deceleration on Tuesday would be welcome news. Still, it may not be enough to convince the bank to hold rates at the July 12^th meeting. The BoC raised rates in May, citing stronger-than-expected GDP growth as one of the reasons for the hike. Last week’s strong retail sales report could force the Bank to raise rates again, as the solid economic numbers are making it more difficult for the BoC to reach its 2% inflation target.

A sharp drop in headline inflation is unlikely to prevent a July rate hike since much of that decline can be attributed to lower energy prices. The real test will be the core rate – a sharper-than-expected decline could convince BoC policy makers to take a pause, which would be welcome news for weary householders who are grappling with high inflation and rising mortgage costs. Otherwise, Canadian consumers are likely to see more rate hikes in the coming months.

The Federal Reserve releases its annual “stress tests” for major lenders, which assess whether the lenders could survive a sharp economic downturn. The stress tests will attract more attention than in previous years, due to the recent banking crisis which saw Silicon Valley Bank and two other banks collapse.

USD/CAD Daily Chart

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