Case for another leg lower in USD/CAD is high

The Canadian Consumer Price is expected to tick higher in February.
The Bank of Canada could soon decide to pause quantitative easing.
The Canadian Dollar could extend its gains versus its American rival.

Statistics Canada will release the February inflation report on Tuesday, as estimated by the Consumer Price Index (CPI). Annualised inflation is expected to have ticked higher, from the 1.9% posted in January to 2.1%. The foreseen uptick is far from worrisome but could have a negative impact on the Canadian Dollar (CAD) in the near term.

At the same time, the Bank of Canada (BoC) will release its core CPI estimates, which measure underlying inflation by trimming volatile food and energy prices. According to the latest release, core BoC CPI rose 0.4% MoM in January and 2.1% YoY in the same month.

The BoC met on March 12 and decided to cut the benchmark interest rate by 25 basis points (bps) to 2.75%, its lowest since 2022. It was the seventh consecutive cut, inspired by concerns that Canadian economic growth may slow down amid the recently unleashed United States (US) trade war. Indeed, 25% levies on Canadian exports of steel and aluminium to the US came into effect. Yet, at the same time, tariffs pose an upward risk to inflation, which could translate into a pause in the current loosening monetary policy cycle.

Ahead of the announcement, the CAD is finding near-term strength in a better market mood. The USD/CAD pair trades in the mid-1.4300 region, holding onto familiar levels yet pulling down from a multi-year high of 1.4792.

What can we expect from Canada’s inflation rate?

According to the BoC Monetary Policy report released in January, Canadian policymakers are aware of the risks related to the trade war and its potential effects on the local economy despite acknowledging that inflation expectations have largely normalised since August 2024. Officials also expect inflation to be volatile through March but to remain near 2% over the projection horizon.

Policymakers forecast growth to average 1.8% in 2025 and 2026, yet added that “US trade policy has emerged as a major source of uncertainty.”

Even further, Governor Tiff Macklem said in an interview following the central bank’s decision that they considered leaving the key policy rate at 3%. “However, since the bank felt that domestic demand was going to be impacted and inflation continued to be at around 2%, “the most appropriate course of action was to cut the policy rate,” he added. Finally, he noted that the impact of the trade war might be more prominent in the second quarter of the year.

When is the Canada CPI data due and how could it affect USD/CAD?

Canada’s February inflation report will be published on Tuesday at 12:30 GMT, and market participants anticipate an uptick in price pressures. As usual, the divergence between the market expectations and the actual figures will be responsible for CAD’s reaction.

Generally speaking, higher-than-anticipated figures would suggest the BoC may need to adopt a more hawkish stance and, hence, push the CAD higher vs other rivals. The opposite scenario is also valid, with softer-than-anticipated readings suggesting the BoC could keep trimming rates. Yet, at the same time, a steep acceleration in price pressures could spur concerns about Canadian economic health and, hence, weigh on the CAD.

Valeria Bednarik, Chief Analyst at FXStreet, notes: “Ahead of the announcement, the USD/CAD gains downward traction, according to technical readings in the daily chart. The case for another leg lower is high amid the broad US Dollar’s (USD) weakness, as at the end of the day, the American economy will be the most affected by the trade war.”

Bednarik adds: “The immediate support and potential bearish target is the 1.4300 mark, ahead of 1.4239, the March monthly low. Additional slides expose the 1.4160 region, where the pair met buyers in February. The pair could gain upward traction on a run past 1.4380, with the next potential bullish target at 1.4542, where the pair topped this month.”

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by Statistics Canada on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.