Canadian CPI: Will It Shake Up CAD?

Today’s Canadian CPI data could be a pivotal moment for CAD traders. Inflation has been a hot topic globally, and Canada is no exception. While most major central banks, including the Bank of Canada (BoC), are contemplating rate cuts, today’s CPI print will help set the tone for how the CAD behaves in the short to medium term.

The market expects inflation to remain under control, but any surprises here could lead to significant volatility in CAD pairs, particularly CAD/JPY. If the CPI comes in higher than expected—let’s say around 2.7% year-over-year—we could see a short-term rally in the Canadian dollar. However, even if inflation runs hot, it’s essential to remember that the BoC is still on track for future rate cuts. The central bank has consistently signaled that they need to ease rates to support economic growth, given global economic headwinds and a cooling domestic market. This means any CAD strength is likely to be short-lived. That’s where the opportunity lies.

The strategy here would be to fade any CAD rallies, particularly against the yen, where we are seeing ongoing yen strength due to global risk sentiment and falling U.S. yields. CAD/JPY has been trading lower recently, with CAD shorts building up in anticipation of BoC rate cuts. Traders could look for a CAD rally post a hot CPI print and then consider shorting CAD/JPY at higher levels, especially if inflation comes in hot but not extreme.

For instance, if CPI data shows a monthly increase of 0.4% or lower but above 0.2%, expect the CAD to rally in the short term. This could push CAD/JPY higher, creating an opportunity to sell the CAD on the rally. Key technical levels to watch include R1 around 106.50. If CAD/JPY spikes toward this level after the CPI release, it could be an excellent place to short the pair, targeting a return to support around 105.50.

With the broader backdrop of dovish central banks, particularly as the Fed moves toward deeper rate cuts, yen strength is likely to remain intact for today. The combination of a weakening global economy and the BoC’s long-term dovish stance makes the CAD vulnerable to selling pressure, particularly in the face of stronger yen demand. Therefore, any short-term CAD rallies—particularly after CPI releases—could be short-lived and offer prime shorting opportunities for those trading CAD/JPY.

As inflation data is released today, keep an eye on key support and resistance levels, and consider fading any significant CAD strength. The deeper rate cuts on the horizon for the BoC will likely bring CAD back down, and this makes shorting rallies the smarter move.