Canadian Inflation Will Push CAD Higher

Canadian inflation is to be reported tomorrow morning. My expectation is that the inflation number increases, as it did last month. This will push the Canadian bond market lower, pushing up rates, while at the same time move the Canadian dollar higher. The only thing that could be a wrinkle in this is the price of oil.

I would not be surprised to see a jump in the headline rate up to near 2.5% year over year. The rest of the world, including the United States, has been seeing the same things with their own, respective inflation rates. The mirror reflection of Canadian inflation and its biggest trading partner, the United States, will continue. Therefore, Canada's inflation report will be fairly strong tomorrow.

The ramifications are simple, really. Canadian interest rates will increase. The Canadian dollar will increase relative to some of its counterparts - those with lower interest rate differentials. As the Canadian economy advances, as some of the economic data we have seen as of late have shown, Canadian interest rates will need to move higher to counterbalance the rising inflation.

But, there are two variables that I am closely watching. Both of these are outlying factors. First, there is the price of oil. Canada's economy and, by consequence, its currency, are closely tied to the price of oil. The United States actually buys more oil from Canada than any other nation. So, if the price of oil drops, the Canadian dollar follows. It is not a linear 1:1 ratio. It is more of a general move.

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