Canadian dollar rises as CPI data clips jumbo rate cut bets
Canada's annual inflation rate increased to 2.0% in October from 1.6% in September, eclipsing the 1.9% rate that economists had forecast, as gas prices fell less than the previous month.
The Canadian dollar gained for a second consecutive day on Tuesday, strengthening against its U.S. counterpart after domestic inflation data exceeded expectations. This data prompted investors to adjust their expectations, reducing the likelihood of another significant interest rate cut by the Bank of Canada.
Canada's annual inflation rate rose to 2.0% in October, up from 1.6% in September, surpassing the 1.9% forecast by economists. The increase was partly due to gas prices falling less than in the previous month.
"This was a relatively hotter inflation report that has reduced the likelihood of a larger rate cut in December, although there are still key developments to come," said Derek Holt, head of capital markets economics at Scotiabank.
Following the inflation report, the market saw increased demand for the Canadian dollar.
Market expectations now place a 23% chance on the Bank of Canada cutting interest rates by half a percentage point at its upcoming policy meeting on December 12, down from 38% prior to the inflation data.
In October, the Bank of Canada made a 50 basis point cut, marking the first such reduction in 15 years outside of the pandemic period.
Holt noted that upcoming economic data, such as third-quarter GDP figures on November 29 and the November employment report on December 6, could provide further insight into potential rate cuts.
On Tuesday, the Canadian dollar rose by 0.3%, trading at 1.3970 to the U.S. dollar, or 71.58 U.S. cents. This marked a continuation of its rebound from a 4.5-year low of 1.4105 set on Friday.
Meanwhile, the price of oil, a key Canadian export, dropped 0.2% to $69.01 per barrel. The restart of production at Norway's Johan Sverdrup oilfield helped offset concerns about potential escalations in the Russia-Ukraine conflict.
Canadian bond yields also rose across the curve. The 10-year yield increased by 1.6 basis points to 3.294%, while the spread between Canadian and U.S. yields narrowed to roughly 109 basis points, with the U.S. bond yielding more.
