USD/CAD Falls As Canadian Inflation Soars to Highest Level Since 2003

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The Canadian dollar strengthened against its US peer in the middle of the trading week, despite the annual inflation rate climbing to its highest level in nearly 20 years. The skyrocketing inflation reading comes as the country is only days a week from a federal election, which could impact the loonie amid deficit-financed spending.

According to Statistics Canada, the consumer price index (CPI) accelerated to 4.1% in August, up from 3.7% in July. This is slightly higher than the median estimate of 3.9%. It also represented the highest inflation rate since March 2003, buoyed by rising prices in seven of the eight major components, including food, energy, and shelter.

On a monthly basis, the CPI rose 0.2%, slightly higher than market estimates of 0.1%.

The core inflation rate, which eliminates the volatile food and energy sectors, advanced 3.5% year-over-year last month.

Economists anticipate swelling inflation for months to come, particularly in the energy and real estate industries. Sal Guatieri, the senior economist at BMO Capital Markets, said in an interview on BNN Bloomberg Television:

“I think because home prices have risen so quickly, now pushing more people into the rental market, we will see further upward pressure on rents through this year. That could keep the shelter component of CPI rising at a good clip and putting general upward pressure on inflation.”

The Bank of Canada (BoC) had anticipated inflation increasing to 3.9% in the third quarter, with Governor Tiff Macklem insisting that this is only temporary and is being caused by international supply-chain interruptions and pent-up demand.

In other economic data, new motor vehicle sales slumped from 169,000 in June to 156,000 in July. Manufacturing sales tumbled 1.5% month-over-month in July, worse than analysts’ forecasts of -1.2%.

On Thursday, housing, employment, and wholesale sales data will be released.

The Canadian bond market was mostly in the green midweek, with the benchmark 10-year yield up 0.052% to 1.224%. The one-year bill was flat at 0.28%, while the 30-year bond jumped 0.03% to 1.769%.

The USD/CAD currency pair tumbled 0.48% to 1.2633, from an opening of 1.2695, at 20:23 GMT on Wednesday. The EUR/CAD dropped 0.39% to 1.4924, from an opening of 1.4985.

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