Loonie firms for third day running after US inflation picks up speed, US Dollar weakens

Loonie Firms for Third Day as Core Canadian Inflation Surprises, USD Weakens

The Canadian Dollar (CAD) extended its gains against the US Dollar (USD) for the third consecutive day on Wednesday, with the USD/CAD exchange rate falling below 1.3900. This movement follows the release of unexpectedly strong core inflation data in Canada and a generally weaker Greenback, weighed down by rising US inflation figures.

Markets responded with caution after Tuesday’s Canadian inflation report showed a notable divergence between headline and core inflation indicators. While the headline Consumer Price Index (CPI) dropped to 1.7% year-on-year in April—a sharp decline from 2.9% in March—the core CPI, the Bank of Canada’s preferred inflation gauge, rose to 2.5% from 2.2%.

On a monthly basis, headline CPI slowed to 0.1% in April, down from 0.3% in March and below expectations. However, monthly core CPI accelerated to 0.5%, up from 0.1%, suggesting that underlying price pressures remain more persistent than initially assumed.

The drop in headline inflation was primarily driven by a 12.7% year-over-year decline in energy prices, attributed in part to the repeal of the federal carbon tax, as well as OPEC’s recent decision to boost oil production, leading to falling global crude prices.

As a result, expectations for an imminent interest rate cut by the Bank of Canada (BoC) have cooled, with investors reassessing the likelihood of policy easing in the near term. At the same time, the US Dollar Index (DXY) fell to a new weekly low as US inflation data added pressure on the Fed, further boosting the CAD.

The combination of strong core inflation in Canada and broader weakness in the US Dollar has led to increased demand for the Canadian currency, with some analysts now forecasting that the USD/CAD pair could test lower support levels in the coming sessions.