US Inflation Data to Set the Tone for USD/CAD


  • The USD/CAD is slightly down for the week, with the Canadian dollar finding some support from the strong rally in oil prices
  • The loonie could stage a decent recovery if market sentiment stabilizes
  • All eyes will be on the US inflation report next week

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USD/CAD ended the week moderately lower, down around 0.6% after gaining for the previous three weeks. The Canadian dollar appeared to have benefited from the sharp rally in oil prices recorded over the past several sessions after OPEC+ decided to cut its production quota, but the bearish tone of the market is likely to have limited its rise.

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Looking ahead, the near-term outlook for USD/CAD is rather neutral to slightly negative. While the solid US jobs market should keep the Fed on a hawkish stance, Canada’s fundamentals are also holding up well to withstand further tightening, meaning monetary policy should not be a key bullish catalyst for the greenback.

However, one factor that could jeopardize the above thesis is sentiment. Should the recent cautious sentiment deteriorate, the greenback could continue its climb, with the move fueled by safe-haven flows. For traders just starting out, it’s important to note that the US dollar tends to trade as a proxy for risk aversion during times of heightened uncertainty.

Related: US Dollar Strengthened by Continued Hawkish Fed Speak

If market conditions improve after extreme selling activity on Wall Street ahead of the weekend, the Canadian dollar is well positioned to take advantage of oil strength. Crude oil, one of Canada’s top exports, is up about 20% since the September low, boosting the country’s trading conditions. In a stable environment, this should be a bullish driver for the loonie.

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Turning our attention to the economic calendar, the September US inflation report, due on Thursday, will steal the spotlight next week. Annual CPI is expected to cool to 8.1% from 8.3% in August, but the core gauge will accelerate to 6.5% from 6.3%. The lower the results the better for the Canadian dollar as weak numbers could prompt the Fed to ease some of its hawkish stance on the sidelines.

Conversely, when inflation data surprises to the upside, as it did last month, anything is possible. In this scenario, risk assets could sell off across the board as traders brace for an ultra-aggressive FOMC, weighing on high-beta currencies like the Canadian dollar.

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— Written by Diego Colman, Market Strategist for DailyFX

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