Canadian Dollar whipsaws on tariff talk and CPI prints

• The Canadian Dollar roiled on Tuesday, hitting multi-year lows before recovering.
• The Bank of Canada is expected to continue trimming interest rates this month.
• Canadian CPI inflation figures ticked down, but core measures accelerated.

The Canadian Dollar (CAD) went end-over-end on Tuesday, whipsawing as Loonie traders grapple with a mixed bag of political headlines and inflation data that strongly implies more rate cuts are on the table. Tariff talk is slowly absorbing most of the market's available attention span, but a still-widening rate differential poses significant risks for the CAD.

US President Donald Trump held off on deploying his long-threatened package of day one tariffs on nearly all of the US' largest trading partners, including Canada. Most market participants assumed (apparently rightly) that the talk of immediate tariffs via executive order were largely bluster for the campaign trail, but Donald Trump is still chasing the high of threatening global nations with self-imposed import taxes that would derail the financial well-being of his own citizens.

Daily digest market movers: Canadian Dollar goes parabolic on tariff Tuesday

• Canadian Consumer Price Index (CPI) inflation ticked down in December, falling to 1.8% YoY versus the expected hold at 1.9%. On a monthly basis, Canadian headline CPI contracted -0.4% MoM, in-line with expectations.
• Cooling headline inflation figures will be more than enough to push the Bank of Canada (BoC) into a fresh batch of rate cuts; interest rate futures traders are now pricing in 83% odds of a 25 bps rate trim from the BoC next week, up slightly from the previous 78%.
• Core inflation metrics, the BoC's own CPI core measure, accelerated to 1.8% YoY versus the last print of 1.6%, but again the monthly figure contracted by -0.3% MoM.
• Donald Trump made a point of leaving the door open to a sweeping 25% tariff on all Canadian exports to the US, possibly in February.
• Mid-tier Canadian Retail Sales figures are due on Thursday, but no drastic swings or changes are expected on that front.

Canadian Dollar price forecast

Tuesday's wide swing sent the Canadian Dollar spiralling into a fresh five-year low, pushing USD/CAD into the 1.4500 handle for the first time since March of 2020. Markets quickly recovered their footing to keep the pair under pressure and staring at a technical floor near 1.4300, but the damage was done and the Loonie is set to continue fighting a losing battle.

USD/CAD daily chart