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USD / CAD - Canadian dollar supported by hawkish BoC outlook.

- Hot Canadian inflation raises BoC rate hike risks.

- FOMC expected to deliver a “hawkish hold” today.

- US dollar trades quietly but remains underpinned.

USDCAD open: 1.3432-36, overnight range: 1.3431-1.3465, close 1.3449, WTI $89.62, Gold, $1931.88.

The Canadian dollar spiked higher in the wake of a hotter-than-expected inflation report. Statistics Canada stated, “The Consumer Price Index (CPI) rose 4.0% year over year in August, following a 3.3% increase in July. The headline acceleration was largely the result of higher year-over-year prices for gasoline in August (+0.8%) compared with July (-12.9%). Excluding gasoline, the CPI rose 4.1% in August, matching the 4.1% increase in July.

The Bank of Canada’s key inflation metrics, CPI-Trim and CPI-Median, jumped to 4.0% y/y on average compared with 3.8% y/y in July.
These results support another 0.25% bp rate increase when the BoC meets in October. However, that is not the message BoC policymakers want you to think. Deputy Governor Sharon Kozicki appeared to shrug off the results, saying, “Ups and downs in inflation are not unusual.”

Her remarks draw another line under the BoC's poor inflation forecasting performance since the end of the pandemic. Policymakers failed to recognize rising inflation was becoming a problem when the pandemic ended and continue to bungle the file to this day. Take Governor Tiff Macklem's comments on September 7. He said, “Monetary policy is working to bring inflation down—and we are encouraged by the progress we’ve made so far. Consumer price index (CPI) inflation was 3.3% in July, roughly in line with what we expected in our July Monetary Policy Report. Our 2% target is now in sight.”

The data suggests otherwise. The BoC failings will be overshadowed by today’s FOMC meeting where the Fed is expected to deliver a “hawkish hold.” All eyes are on the dot-plot forecast to see if officials anticipate another rate hike and when the first rate cut can be expected.

GBPUSD stole the show after UK inflation fell more than expected, leading to traders downgrading the possibility that the Bank of England raises interest rates tomorrow. GBPUSD traded in a 1.2334-1.2398 range.

EURUSD drifted in a 1.0673-1.0718 band on expectations that the Fed pauses, but the topside is capped by the risk of hawkish dot-plot projections.

USDJPY traded in a 147.69-148.17 range, with prices underpinned by US Treasury yields and expectations for a hawkish Fed outcome.

AUDUSD firmed in a 0.6448-0.6482 range thanks to steady commodity prices.