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Forex: Canadian Inflation Drops in November, Loonie Tumbles

Forex: Canadian Inflation Drops in November, Loonie Tumbles

David Rodriguez and Renee Mu,

THE TAKEAWAY: [Canadian economic growth as expected in October, but November CPI Inflation lower than expected] > [Lower inflation negatively affects interest rate forecasts] > [USD/CAD Bullish]

The Canadian economy saw below-forecast inflation through November, and the year-over-year CPI inflation rate fell to its lowest levels since 2009. A simultaneous GDP report showed that the economy grew as expected through October. Yet the net result was a drop in short-term interest rate forecasts from the Bank of Canada. And indeed, the Canadian Dollar fell noticeably in the minutes following the CPI release.

The year-over-year Canadian CPI inflation rate fell to its lowest levels in over three years on important declines in transportation costs. The 0.8 percent headline inflation rate is below the Bank of Canada’s official target band of 1-3 percent. It is worth noting that Bank of Canada Core CPI saw a more modest decline at 1.2 percent from 1.3 percent in October. Yet trader reactions show fear the Bank of Canada’s next move may actually be a rate cut.

USD/CAD 1-minute Chart: December 21, 2012

Forex_Canadian_Inflation_Drops_in_November_Loonie_Tumbles_body_1221-2.png, Forex: Canadian Inflation Drops in November, Loonie Tumbles

The Canadian Dollar fell sharply in the moments following the release, registering fresh 2-week lows versus the US Dollar. Further disappointments in inflation results could add further pressure to the Bank of Canada and, by extension, the Canadian currency itself.

--- Written by David Rodriguez and Renee Mu, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.