USD/CAD sees more upside as soft Canadian CPI boosts BoC large rate cut bets

• USD/CAD finds bids as the Canadian headline CPI decelerated in December on year. Month-on-month CPI deflated.
• Soft Canadian inflation data stokes hopes that the BoC would continue reducing interest rates by 50 bps.
• US Trump prepares to impose 25% tariffs on Canada and Mexico on Feb 1.

The USD/CAD pair witnesses buying interest near 1.4430 in Tuesday’s North American session as Statistics Canada reported that soft inflation data for December. The agency showed that the headline inflation rose at a slower pace of 1.8%, compared to estimates and the former release of 1.9% on year.

Month-on-month headline CPI deflated by 0.4%, as expected, against a flat reading in November. Soft CPI data has deepened risks of inflation undershooting the Bank of Canada’s (BoC) target of 2%. This scenario would force the BoC to continue unwinding the policy restrictiveness at an ongoing pace. The BoC has been reducing its interest rates at a larger-than-usual pace of 50 basis points (bps) from its last two policy meetings.

However, the Reuters poll in the January 10-16 period showed that the BoC is almost certain to cut interest rates by 25 basis points (bps) to 3% in the policy meeting later this month.

The outlook of the Canadian Dollar was already vulnerable as US President Donald Trump confirmed that he would impose 25% tariffs on Canada and Mexico on February 1. Also, Trump’s plan to accelerate strategic oil reserves weighed on the Loonie, given that Canada is the leading exporter of Oil to the US and resulting lower Oil prices from higher production would lead to lower foreign inflows.

Meanwhile, the US Dollar (USD) has rebounded strongly on Tuesday after plummeting on Monday as Trump has not denied the imposition of tariffs, though have delayed, citing that “We are not ready for that yet.” The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, climbs above 108.50.