Canada releases inflation figures for February today, ING's FX analyst Francesco Pesole notes.
USD/CAD can move towards 1.4200 in the near term
"The end of a sales tax holiday is expected to have driven headline CPI back above 2.0% year-on-year, but the main focus will as usual be on the trim and median core measures, which are expected to have remained below 3.0%. Any meaningful core inflation rebound in the month before US tariffs on steel and aluminium took effect can probably prompt markets to price out one of the two rate cuts currently expected."
"The Bank of Canada has stressed how the policy response to the US-Canada trade war will depend on the growth-inflationary balance and hinted that it would not be doing the heavy lifting in supporting the economy if prices rise too. So, the starting point for inflation before the initial tariff impact is key, and any upside surprises today can pave the way for a move to 1.4200 in USD/CAD."
"Our short-term fair value model shows that there is now a rather contained 1% risk premium left on USD/CAD, meaning that a return to the February lows would almost entirely erase the additional loonie weakness related to tariffs. We would not chase USD/CAD much lower should it touch 1.42, as April should bring fresh negative news on trade and dovish pricing on the Fed may prove overdone."
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