The USD/CAD currency pair is edging lower, nearing the bottom of its recent trading range between 1.4000 and 1.4080, according to FX analysts at Brown Brothers Harriman (BBH). The move comes as stronger-than-expected inflation data from Canada and limited room for the Bank of Canada (BOC) to cut rates provide support for the Canadian Dollar (CAD).
🔥 Canada’s September Inflation Surprises to the Upside
Recent CPI data from Canada showed a notable jump in inflation, defying expectations and signaling continued price pressures:
- Headline CPI rose to 2.4% year-over-year in September, up from 1.9% in August and above the 2.2% consensus estimate. This marks a seven-month high, largely driven by base effects.
- Core CPI, which averages the trimmed mean and median CPI, climbed to 3.15%, the highest level in 19 months. Analysts had expected 3.0%, slightly below the previous reading of 3.10%.
BBH noted that the underlying inflation trend shows no signs of easing, making it less likely that the BOC will aggressively cut rates in the near term.
🏦 Limited Easing Options for the Bank of Canada
Despite concerns about slowing economic growth, the hot inflation data suggests that the BOC has limited flexibility to lower interest rates further. The central bank has previously estimated its neutral rate range between 2.25% and 3.25%, and current market pricing implies:
- A 75% chance of a 25 basis point cut to 2.25% at the next policy meeting on October 29
- Low odds of an additional cut in Q1 2026
📈 What Could Strengthen the Canadian Dollar?
In addition to the inflation backdrop, BBH highlighted two potential tailwinds for the CAD:
- A possible US-Canada trade agreement may be reached as early as next week.
- A pro-growth federal budget for 2025, set to be announced on November 4, could further boost investor confidence in the Canadian economy.
📉 Market Reaction
As of now, USD/CAD is trading closer to the lower end of its recent range, reflecting both CAD strength and USD weakness. Traders will be closely watching for any developments in trade talks and Canadian fiscal policy, as well as signals from the BOC in the upcoming rate decision.
