On Tuesday, January 21st at 21:30, Statistics Canada will release its December inflation report, which is based on the Consumer Price Index (CPI). Early predictions suggest that Canada's overall inflation rate in December may increase by 1.8% year-on-year. This data is crucial for the Canadian economy and monetary policy, especially for the trend of the Canadian dollar and the future interest rate policy of the Bank of Canada.

In addition to the overall CPI data, core CPI data will also be released. The core CPI excludes volatile items such as food and energy, which can better reflect the long-term trend of inflation. The core CPI data for November 2024 showed a month on month decrease of 0.1%, but a year-on-year increase of 1.6%. In contrast, the overall CPI for November increased by 1.9% year-on-year and remained unchanged compared to the previous month. These data indicate that although wages and consumption have increased, the pressure of price increases has not significantly intensified.

These inflation data have become the focus of market attention, especially their potential impact on the Canadian dollar. The interest rate decisions of the Bank of Canada play a crucial role in this regard. Since June 2024, the Bank of Canada has cumulatively lowered its policy rate by 175 basis points and further lowered its benchmark rate to 3.25% on December 11th. This interest rate cut indicates the Bank of Canada's concern about slowing economic growth, especially in the context of increasing global economic uncertainty.

However, the performance of the Canadian dollar is still not satisfactory. Due to the strong rebound of the US dollar, the Canadian dollar continued to weaken, pushing the US dollar/Canadian dollar exchange rate to its highest level since May 2020, breaking through the 1.4400 mark. The market is closely monitoring December inflation data to assess the future trends of the Canadian economy and its currency.

For the Bank of Canada, the decision to cut interest rates by 50 basis points on December 11th was not easy to make. According to the meeting minutes released on December 23rd, some members of the central bank support a 25 basis point interest rate cut, which has sparked significant controversy. Bank of Canada Governor Tiff Macklem said that future interest rate cuts may be more gradual, which is different from previous statements about the need for stable easing. Members who support a more significant interest rate cut point out that weak economic growth and the risk of downward inflation require more aggressive monetary policy adjustments, but not all recent data support such radical measures. The decision to cut interest rates reflects the cautious operation of the Bank of Canada in the face of economic uncertainty.

According to analysis by TD Securities, it is expected that CPI will slightly increase to 2.0% year-on-year and decrease by 0.2% monthly. The seasonal impact of core commodities may put pressure on monthly CPI, but food prices and a weaker Canadian dollar will provide some support. Core inflation is expected to slow down by 0.2 percentage points year-on-year to 2.45%, but it is expected that the Bank of Canada will ignore these short-term fluctuations and continue to monitor the overall economic situation.

Technical analyst interpretation:

The inflation report for December is about to be released, but the reaction of the Canadian dollar may depend on whether there are any significant surprises in the data. If the actual data meets expectations, it may not have an impact on the current interest rate outlook of the Bank of Canada.

From a technical perspective, the US dollar/Canadian dollar has been consolidating in a range since mid December 2024, recently breaking through 1.4400 and reaching a new high in recent years. The strong rebound of the US dollar has put strong pressure on the Canadian dollar. With the recovery of the US economy and fluctuations in crude oil prices, the Canadian dollar may continue to weaken.

Considering the continuous rise of the US dollar and fluctuations in crude oil prices, it is expected that the Canadian dollar will continue to weaken in the short term. If the US dollar remains strong, the US dollar/Canadian dollar may once again challenge the recent high of 1.4515 (January 20 high) and may break through the high of 1.4667 set on March 19, 2020.

On the downside side, the initial support range for USD/CAD is at 1.4278 (the low point on January 6th), followed by the 55 day moving average of 1.4177 and the psychological level of 1.4000. The further downward support level is the low point of 1.3823 on November 6th, followed by the support level of 1.3816 on the 200 day moving average. If the US dollar/Canadian dollar breaks through these support levels, it may trigger more selling pressure, with the initial target being the low point of 1.3418 on September 25th.

The trend of USD/CAD is influenced by multiple factors, and the situation of strong USD and weak CAD may continue. The weakness of the Canadian dollar has led to a sustained upward trend in the US dollar/Canadian dollar exchange rate, and the market is concerned whether the December inflation data will have a substantial impact on the monetary policy of the Bank of Canada. If the data fails to significantly change market expectations, the weakness of the Canadian dollar may continue and drive the US dollar/Canadian dollar to further rise.

summary

The release of Canada's December inflation data is crucial for the market. In terms of fundamentals, although wages and consumption have increased, overall inflationary pressures are relatively mild and economic growth is weak. Technically speaking, the US dollar/Canadian dollar exchange rate may continue to maintain an upward trend, especially against the backdrop of a strong US dollar and fluctuations in oil prices. The market is paying attention to the upcoming inflation data to determine the next policy direction of the Bank of Canada and its long-term impact on the Canadian dollar.