USD/CAD: Loonie setup ahead of Canada inflation data

on Jan 17, 2023
  • The USD/CAD exchange rate has been rising slightly recently.
  • Focus turns to the upcoming Canada consumer price index (CPI) data.
  • Economists expect data to show that the country’s inflation declined in December.

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The USD/CAD price drifted upwards as the market waited for the upcoming Canada consumer price index (CPI) data. It rose to a high of 1.3431, which was about 80 basis points above the lowest level in 2023. 

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Canada inflation data ahead

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The USD/CAD exchange rate has been in an upward trend in the past few days ahead of the latest Canada CPI data. Economists expect the data to show that the headline consumer inflation data will come in at -0.5% in December from the previous 0.1%. This decline will translate to an annualized decline from 6.8% to 6.4%. 

Core consumer inflation is also expected to have dropped from 6.7% to 6.6%. These numbers will come a week after the US published weak inflation numbers, as we wrote here. Global inflation has been in a downward trend in the past few months. 

This slowdown has been caused by several factors. First, natural gas prices have been in a downward trend as supply outstrips supply. Second, the supply chain challenges that existed during the pandemic have been falling. According to the WSJ, ocean shipping rates plunged by 60% in 2022. Shipping costs have a direct impact on prices. 

Further, high-interest rates have been rising in the US and Canada. This means that the prices of most items sensitive to rates have been seeing less demand. For example, used and new car prices have been plunging. Tesla, the biggest EV company in the world, has slashed EV prices in China and the United States.

Therefore, the USD/CAD exchange rate will react to Canada’s inflation data. A lower figure means that the Bank of Canada (BoC) will start moving at a slower pace in the coming meetings.

USD/CAD forecast

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The 4H chart shows that the USD to CAD forex rate has been in a slow comeback. It has moved below the important support level at 1.3485, which was the lowest level on December 28. The pair remains below the 25-day moving average. 

It has formed what looks like a bearish flag pattern that is shown in red. Therefore, I suspect that the USD/CAD pair will have a bearish breakout as sellers target the key support level at 1.3347. A move above the key resistance point at 1.3450 will invalidate the bearish view.


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