In December, Canada’s annual inflation rate went up to 2.4%, slightly above what markets expected, following a 2.2% rise in November. However, monthly inflation dropped by 0.2%. The Bank of Canada’s core inflation rate, which excludes volatile items like food and energy, rose 2.8% annually but fell 0.4% monthly. Other measures of inflation showed stable price pressures: Common CPI at 2.8%, Trimmed CPI at 2.7%, and Median CPI at 2.5%.

Consumer Price Index Increase

The Consumer Price Index (CPI) increase was influenced by the end of a temporary tax break on December 14, 2024. Gasoline prices decreased year-over-year in December, while the overall CPI without gasoline rose by 3.0%. After the inflation data was released, the Canadian Dollar gained strength against major currencies, particularly the US Dollar. As the Canadian CPI figures were expected to decrease by 0.3% monthly, any effects on USD/CAD volatility will likely be minor unless the actual numbers differ significantly. The Bank of Canada is closely watching inflation, aiming to keep it between 1% and 3%. High inflation may lead to higher interest rates, which usually strengthens a currency, whereas low inflation could weaken it.

Canadian Economy and Policy

With December’s inflation data showing a surprising increase to 2.4%, market expectations of a cautious Bank of Canada (BoC) are now challenged. The core measure at 2.8% indicates that underlying price pressures aren’t fading as quickly as anticipated. This puts discussions about near-term BoC rate cuts on hold and raises the likelihood of a more hawkish approach. For derivatives traders, this may lead to higher implied volatility in Canadian dollar options, especially before the BoC meeting on January 28th. It may be wise to buy USD/CAD put options to capitalize on potential Canadian dollar strength or sell out-of-the-money call options to collect premiums, believing that gains in this pair might be limited. This unexpected data makes having downside exposure in USD/CAD a smart strategy for the next few weeks. This situation is intensified by the policy differences with the United States, where the Federal Reserve has hinted at a possible easing of monetary policy. This Canadian inflation report strengthens the case for a growing interest rate gap in Canada’s favor, which is a key factor for a stronger CAD. A similar trend occurred in mid-2023 when a strong Canadian economy led the BoC to maintain its tightening path longer than many had expected. Looking at the overall Canadian economy, the Bank of Canada has maintained its policy rate at 5.0% since last summer, driven by ongoing inflation concerns. Although recent Statistics Canada data showed GDP growth slowed to an annualized rate of just 0.5% in the third quarter of 2025, today’s inflation data gives the BoC a reason to focus on price stability. This resilience allows the central bank to wait for more data before considering rate cuts. Given the supportive context of stable energy prices, with Western Canadian Select crude remaining steady, the Canadian dollar seems poised for upward movement. We should view the current USD/CAD level below 1.3900 as a new lower range rather than a temporary drop. Therefore, it makes sense to consider bearish positions on any bounce in USD/CAD, possibly using futures contracts as a strategy in the coming weeks. Create your live VT Markets account and start trading now.

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