USD/CAD will continue to trade above the 200-DMA at around 1.3480 in the near term – MUFG

The release of the Canadian CPI report for January has provided a setback for the CAD. The report revealed that headline inflation started this year on a weaker footing with the annual rate slowing by 0.5 points to 2.9%. The BoC will be reassured that core inflation measures dropped back as well in January. The trim core CPI measure by 0.3 points to 3.4% and median core CPI measure by 0.2 points to 3.3%. While the slowdown in core inflation measures is a welcome development, they remain uncomfortably high for the BoC which would like to see three and six-month annualized measures falling back below 3.0%.           

As a result, we still expect the BoC to remain cautious over signalling imminent rate cuts at their next policy meeting on 6th March. However, the softer CPI data has encouraged market participants to more fully price in the BoC beginning to cut rates by the June policy meeting.

In light of these developments, we see room for the Canadian rate market to price in more than 75 bps of rate cuts by the end of this year.

The developments have increased the likelihood that USD/CAD will continue to trade above support from the 200-DMA which comes in at around 1.3480 in the near term.