CAD Inflation Data: Following The US Trend With Potential Slowdown!

Canadian inflation data is scheduled to be released tomorrow morning EST, and analysts widely anticipate it to reflect slowing inflation. The prior month’s report indicated that Canada’s annual inflation rate dropped to 3.4% in May 2023, compared to 4.4% in the previous month, marking the lowest rate since June 2021. This decline was primarily attributed to base year effects from the impact of Russia’s invasion of Ukraine on international energy prices. The result aligned with the Bank of Canada’s (BoC) baseline scenario, which anticipates inflation to ease to around 3% by summer, raising doubts about the extent of future rate hikes in its tightening campaign. The slowdown was largely driven by a 2.4% decline in transportation prices, mainly due to a significant 18.3% plunge in gasoline prices.

Accompanying the Consumer Price Index (CPI), Canadian Producer Price Index (PPI) data is also set to be released simultaneously. In the previous release, industrial producer prices in Canada experienced a 1% slide in May 2023, surpassing market expectations of 0.7%. The decline was attributed to falling prices for energy and petroleum products, including notable drops in diesel fuel (-8.5%) and finished motor gasoline (-2.9%), along with decreased prices for primary non-ferrous metal products (-2.8%) and primary ferrous metal products (-1.3%), partly due to slowing global economic conditions and oversupply issues, particularly in China. Not much is expected to change with poor GDP data out of China at the start of the week.

From a technical standpoint, the CAD has been on a downward trend versus the USD since March and has reached specific downside Fibonacci targets based on a 61.8% retracement. Recently, the price bounced off the 100% extension, and if inflation data continues to come in weaker than expected, further downside pressure is anticipated for the CAD, possibly leading it toward the 1.275 level.

Overall, the forthcoming inflation data will be crucial in determining the Canadian dollar’s future direction. Better-than-expected data could indicate a potential end to the rate hikes, while weaker results may exert additional downward pressure on the CAD against the USD.