USD/CAD Eyes Rebound as Soft CPI Data Clouds BOC Outlook

• Canadian CPI came in well below expectations this morning at 2.3% y/y in March.
• The data slightly favors a BOC hold this week in my view, though a proactive 25bps rate cut cannot be ruled out.
• There is some early evidence that USD/CAD may be carving out a near-term bottom heading into tomorrow’s BOC meeting.

At the start of the North American session, we learned that Canada’s consumer inflation rate unexpectedly eased to 2.3% y/y in March, below expectations of a 2.6% reading and down notably from 2.6% in February.

Digging into the report, the drop was driven primarily by falling gasoline and travel tour prices. Monthly CPI rose just 0.3% m/m, half of the 0.6% forecast.

Food and beverage prices surged following the expiration of a tax break, while shelter inflation hit its lowest since 2021, reflecting lower mortgage payments and cooling rent. Meanwhile, travel costs plunged amid weak consumer sentiment, reduced US trips, and trade tensions.

Crucially, the softer print comes on the verge of tomorrow’s Bank of Canada meeting, with traders now pricing a roughly 40% chance of an interest rate cut from the central bank. Though tariffs may push some prices higher in the coming months, economic headwinds are clearly mounting. With business and consumer confidence faltering and labor markets weakening, Tiff Macklem and the rest of the BOC will be weighing the slowing economy against the risks of reaccelerating inflation (not to mention the perception of politicization ahead of the election at the end of the month).

With traders near evenly split on the BOC’s decision tomorrow, near-term volatility in USD/CAD is all but certain as offside traders are forced to adjust either way. Regardless of whether the BOC opts to cut interest rates or not at this meeting, additional interest rate cuts are highly likely this year, with traders pricing in nearly two full 25bps rate cuts by the end of the year:

Source: Bloomberg

At the risk of getting egg on my face in less than 24 hours, the data slightly favors a BOC hold this week in my view as central banks across the globe opt for a more “conservative” path amidst the on-again, off-again US tariffs, but a proactive 25bps rate cut cannot be ruled out.

Canadian Dollar Technical Analysis: USD/CAD Daily Chart

Source: TradingView, StoneX

Technically speaking, there is some early evidence that the North American pair may be carving out a near-term bottom. As the daily chart above shows, prices may be forming a “morning star” candlestick reversal pattern. For the uninitiated, a morning star candle formation is a relatively rare candlestick formation created by a long bearish candle, followed by a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and hints at the potential for more strength to come.

If we do see the BOC hold interest rates unchanged, USD/CAD would likely recapture its 200-day MA, with room to run toward previous resistance near 1.4100. On the other hand, a proactive interest rate cut could quickly take the pair back down toward Monday’s low in mid-1.3800s.

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