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CAD Vulnerable as Oil Plunge is Set to Drag Inflation Lower

CAD Vulnerable as Oil Plunge is Set to Drag Inflation Lower

2018-12-19 12:15:00
Justin McQueen, Analyst
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CAD Analysis and News

  • Canadian Dollar Vulnerable to Inflation Drop
  • BoC foresees Weaker Inflation Amid Oil Plunge

See our Q4 FX forecast to learn what will drive major currencies throughout the quarter.

Canadian Dollar Vulnerable to Inflation Drop

CAD traders will be placing close eye on the latest inflation data at 1330GMT, where it is expected for the headline reading to show a sizeable drop to 1.8% from 2.4%. Given the drop-in plunge in oil prices since the beginning of Q4, this is not entirely surprising. Alongside this, the BoC had also alluded to weaker inflation in the foreseeable future after stating that the inflation rate should ease by more than the bank had forecast.

Key Focus on Core Metrics

However, while softer headline inflation can weigh on the Canadian Dollar. The main focus should be on the core metrics, which is the BoC’s preferred measure of inflation (average between common, median and trimmed inflation) and continues to hover around the 2% mark. If, however, the core readings drop in tandem with the headline figure, this in turn could see USDCAD make a push for 1.3550 as investors continue to price out the likelihood of a near term BoC hike. Although, a firmer than expected reading could see USDCAD test support at 1.3385. According to option markets, o/n vols implying a 96pip breakeven for USDCAD (covering CPI and Fed decision).

USDCAD PRICE CHART: Daily Time Frame (Apr 2017-Dec 2018)

CAD Vulnerable as Oil Plunge is Set to Drag Inflation Lower

Chart by IG

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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