CAD Rallies Stall on CPI As Dollar Consolidates Post FOMC

Azeez Mustapha
18 August 2021 | Updated: 18 August 2021

After a stronger-than-expected consumer inflation figure, the CAD climbs slightly in the early US session. However, the Loonie’s strength is limited.

The consumer price index in Canada rose 0.6% mom in July, which is the fastest pace since January. The annual consumer price index accelerated to 3.7% y/y in July, compared with 3.1% y/y in June, which is higher than expected at 3.4% y/y. six of the eight main components, with house prices making the largest contribution to the rise in house prices.

The consumer price index for common shares remained unchanged at 1.7% YoY, which is below the 1.8% YoY forecast. The median CPI rose from 2.4% YoY to 2.6% YoY, which is above expectations of 2.4% y/y. Reduced CPI rose from 2.7% y/y to 3.1% y/y, which is higher than expected at 2.5% y/y.

The dollar fell after the Federal Open Market Committee (FOMC) issued the minutes of its July policy meeting. Several members stressed in the FOMC’s publication that an announcement of asset tapering should not be regarded as the start of a fixed path for raising the policy rate. With the first reaction, the US Dollar Index (DXY), which had earlier in the day reached its highest level since early April at 93.26, dropped below 93.00 but quickly recovered its losses. The DXY was flat for the day at 93.13 at the time of writing.

In Canada, price growth continues to surprise the upside. Simultaneously, it is becoming more prevalent across all categories. The pandemic’s impact on price increases is felt not just on the supply side, where manufacturing disruptions have pushed up the cost of manufactured products like automobiles, but also on the demand side, where policy incentives have boosted expenditure on housing and durable goods.

CAD: Reverts to Session Lows As Inflation Rises in July

In response to higher-than-expected Canadian consumer inflation numbers, the USD/CAD pair retreated to daily lows of 1.2600. For the time being, the CAD has an upward intraday tilt. Rebounding from 1.2421 should aim for a test of resistance at 1.2805 first. Following a break there, the entire increase from 1.2005 to the Fibonacci level of 1.3022 will restart. Breaking 1.2488 minor support on the fall will shift the bias back to downward for 1.2421 support and lower.

Furthermore, the Bank of Canada’s core CPI (excluding the most volatile goods) rose 0.6 percent month over month and 3.3 percent year over year, surpassing expectations of 0.1 percent and 2.8 percent, respectively.

A goodish bounce in crude oil prices, on the other hand, supported the commodity-linked loonie and put pressure on the USD/CAD pair. On the other hand, the odds of the Fed tightening policy sooner rather than later were dwindling, putting the US dollar bulls on the defensive.

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Azeez Mustapha

Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.