The Canadian dollar strengthened for a second consecutive day on Tuesday, November 19, against its U.S. counterpart. This surge was fueled by stronger-than-expected inflation data, leading investors to revise their expectations regarding a large interest rate cut from the Bank of Canada (BoC).
Canada’s Inflation Rate Surpasses Expectations
Canada’s annual inflation rate rose to 2.0% in October, up from 1.6% in September. This increase was notably higher than the 1.9% forecast by economists, primarily due to a smaller-than-expected drop in gas prices. The stronger-than-anticipated inflation report led markets to reduce the probability of a significant interest rate cut by the BoC in December.
Derek Holt, Head of Capital Markets Economics at Scotiabank, noted that this “hotter inflation report” could scale back expectations of a large rate cut in December, but further developments are still expected to impact the central bank’s decisions.
Impact on the Canadian Dollar and Market Sentiment
Following the inflation report, the Canadian dollar saw a 0.3% rise, trading at 1.3970 against the U.S. dollar, or 71.58 U.S. cents. This marked a recovery from a 4.5-year low reached just days earlier at 1.4105.
Markets now see a 23% chance the BoC could cut interest rates by 50 basis points on December 12, down from a 38% probability prior to the inflation data release. The BoC had already cut rates by 50 basis points in October, marking the first such move in 15 years outside of the pandemic era.
Looking Ahead: Key Economic Data and Oil Prices
The BoC’s future decisions will be guided by key data releases in the coming weeks. These include the third-quarter GDP data on November 29 and the November employment report on December 6. These reports will provide further insight into the Canadian economy and the potential need for additional monetary easing.
In addition, the price of oil, a major Canadian export, was trading lower at $69.01 per barrel, influenced by the restart of production at Norway’s Johan Sverdrup oilfield. Investor concerns about the ongoing Russia-Ukraine conflict also played a role in the fluctuations.
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Bond Market and Economic Outlook
Canadian bond yields moved higher, with the 10-year yield rising by 1.6 basis points to 3.294%. Meanwhile, the gap between Canadian and U.S. 10-year bond yields narrowed to about 109 basis points, favoring U.S. bonds.
As Canada navigates these economic factors, markets will continue to closely monitor inflation, GDP, and employment data, which will help shape expectations for future Bank of Canada rate decisions.
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