Canadian Dollar Surges to Six-Month High After Strong CPI Print

The Canadian Dollar reached its strongest level since June 1 after Canada's July Consumer Price Index (CPI) beat forecasts, but the advance was short-lived. The CAD initially strengthened on Monday after headline inflation hit the top of the Bank of Canada's target range, increasing by 3.0% year-over-year in July.

However, the currency's gain was not sustained, and USD/CAD subsequently touched 1.3845 before recovering to near its opening levels. The Statistics Canada CPI release also showed gasoline inflation accelerating to 25.7%, while air transportation prices rose 12.0%.

BMO Economics senior economist Robert Kavcic noted that the inflation side is looking stable and well-behaved, despite a bit of heat in July. However, shorter-term measures were firmer, with the average three-month annualised pace across four core gauges rising to 2.5% from 2.0%.

Scotiabank economist Derek Holt warned that measures like these lean against staying at the low end of the BoC's neutral rate range, but markets still price a possible quarter-point increase by year-end. The Bank of Canada will weigh this information at its upcoming decision on September 2.