The Canadian Dollar reversed course last week, after having moved to the 0.9840 area last Tuesday. Since then, the USD/CAD returned back above parity at 1.0050 but for the past couple of sessions confined itself to a pretty narrow range between 0.99 and 0.9985.
Today' after testing the bottom part of that range near 0.99, prior to the release of the Canadian CPI data, we saw the pair move back in favor of the greenback following the release, rallying to just below the parity level.
Why the sudden move, that is because the consumer price data released today came in weaker than expected. While the headline annual rate rose to 2.4% in December, from 2.0% in November, the increase was smaller than expected (2.5%) and was mainly led by higher energy prices. On the month prices were flat. If we dig deeper and look at the core rate which excluded volatile items such as energy, we see that on the month prices actually fell 0.3%, while rising to a 1.5% annual rate.
The figures were all weaker than forecast, which means the Bank of Canada has more leeway to keep rates steady as it does not want to push up the value of the Canadian Dollar with higher interest rates, and has said that a strong Canadian Dollar is a headwind for the economy.
Last week, the CAD came under pressure as a result of the more dovish BOC and their Monetary Policy Report
From Wall Street Journal: Canada Dollar Retreats Following Central-Bank Policy Report
.. much of the selling can be attributed to the Bank of Canada's policy report released Wednesday morning and subsequent remarks from BOC Governor Mark Carney, which confirmed the dovish guidance provided by the bank on Tuesday, when it left its key overnight target rate at 1.00%. Carney said in a news conference that Canada isn't benefiting from an improved U.S. outlook because a strong currency and poor productivity have led to a loss of competitiveness.
One suspects that the [Bank of Canada] is quite pleased with the two-day rally in USD, which has seen CAD as the worst performing major currency, in part thanks to BoC's caution/dovishness, said a report from RBC Capital Markets.
Today's report will be further confirmation of this dovish stance by the Bank of Canada and makes it less likely that the USD/CAD will break below its recent lows in the short term. With oil prices also slipping below the $87 area that is another negative fundamental development for the CAD pair. While there will be strong cross currents at play on the USD/CAD pair, we can look at other CAD crosses this week to play the soft Canadian fundamental outlook.