As the expression goes, “when the US sneezes, Canada catches a cold.” Well, when US inflation cools substantially, the Canadian dollar gains. This morning’s US consumer price index (CPI), a measure of goods and services costs across the economy, fell year-over-year to 3%. This is a more rapid cooling than the 3.1% economists had expected.
Core prices, which exclude volatile food and energy items and are examined closely by the Federal Reserve, only rose 0.1%. More encouragingly, the report showed that prices have cooled broadly in the US economy. This stands in contrast to what happened in the first quarter of the year when inflation was persistently high. Perhaps most importantly, the report showed that housing costs are slowing for the first time since the COVID-19 pandemic.
What does all this mean for the Canadian dollar? Firstly, and most impactful, is that the FED is more likely to begin lowering interest rates sooner rather than later. The market consensus is that this will start happening in September. This, in itself, means that the US economy will not experience a significant downturn, and the Canadian economy will potentially see a lift from a more robust US economy. Secondly, with the FED projected to begin cutting rates, the Bank of Canada will have more leeway to lower rates more rapidly without being hampered by the interest rate differential between the two countries. All this is good for the Canadian dollar.
If inflation continues to cool off on both sides of the border and the FED begins cutting rates, we expect the Canadian dollar to continue on a steady path of incremental increases. Perhaps the 1.36 level will become more of a ceiling for the USD/CAD pair and not a floor, as is currently the case. If you are a US dollar seller, you may want to consider selling sooner rather than later.
The Canadian dollar is currently trading at 1.3618 CAD against the US Dollar.
