Low inflation pressures Canadian dollar

The Loonie dropped to a four-month low against the US dollar today after the Canadian consumer price index dropped below the Bank of Canada’s target.

As with the US and the eurozone, low inflation appears to be a problem for Canada at the moment, with today’s release of Canadian CPI data showing a 0.2% drop in prices month-on-month in October, taking the annual rate to 0.7%.

This result was below expectations and also below the low end of the Bank of Canada’s 1% to 3% target range. Governor Stephen Poloz dropped wording from the central bank’s last policy statement alluding to a future rate rise, ending a year-long tightening bias. With inflation now undershooting the target, the chances increase that the BoC’s next move might be a rate cut.

By mid-afternoon in New York, USD/CAD was up 0.14% at 1.0532, after hitting as high as 1.0569 earlier in the day, the weakest the Loonie has been against the US dollar since early July.

The weak CPI data was somewhat offset by a separate report showing unexpected strength in Canadian retail sales. Month-on-month sales rose 1.0% in September, versus expectations for a 0.5% increase, for a third successive increase. Retail sales are now up 3.6% year-on-year, picking up pace from the annual change of 2.7% seen for August. The strength here bodes well for how Q3 GDP might be looking.

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