Canadian Dollar Defies CPI Miss as Inflation Expectations Rise: USD/CAD, AUD/CAD

The Canadian dollar strengthened despite a slightly softer-than-expected CPI report, as rising longer-term inflation expectations complicated the Bank of Canada's rate outlook. With the BoC meeting on 28 October, conflicting inflation signals could shape expectations for USD/CAD and AUD/CAD.

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Canadian Dollar Holds Firm as BoC Inflation Risks Persist

The Canadian dollar strengthened against most FX majors on Monday despite a slightly softer-than-expected CPI report and reduced expectations of an October BoC hike. Headline CPI rose 3.1% y/y, just below the 3.2% expected, while trimmed mean inflation eased to 1.84%. That divergence suggests inflationary pressures remain relatively contained beneath the headline figure, giving the BoC some breathing room ahead of its 28 October meeting.

BoC Surveys Reveal Persistent Inflation Risks

However, the BoC's quarterly surveys presented a less dovish picture. While consumer inflation expectations edged lower over the one- and two-year horizons, five-year expectations rose to 3.9% from 3.4% in Q2, their highest level in the available series since 2015. Businesses also reported persistent inflation pressures from energy prices and tariffs, raising concerns that price increases could become more widespread.

This divergence may help explain why CAD remained supported despite softer near-term BoC pricing. While an October hold appears increasingly likely, elevated longer-term inflation expectations suggest the tightening cycle may not be over. Attention now turns to whether the BoC's updated projections reinforce expectations of further hikes later this year or into 2027.

USD/CAD Technical Analysis: US Dollar vs Canadian Dollar

The potential pullback I had been circling for USD/CAD has finally got underway, with last week’s bearish engulfing candle snapping a five-week winning streak. It is also the third candle of the bearish reversal pattern known as an evening star formation. Prices continued lower on Monday following the hotter long-term inflation outlook, even though the US dollar index held its ground.

The daily chart shows that Monday’s low found support almost perfectly at the monthly pivot point and 50-day EMA. And with the daily RSI (2) oversold below 10 and a lower wick on the daily candle, perhaps we’ve seen the best part of the initial move lower for USD/CAD. Bears may therefore be seeking to fade smaller bounces into resistance levels from here, which brings the 2025 high, 1.42 handle or June high into focus – in anticipation of a move down towards 1.40.

Source: ICE, TradingView

AUD/CAD Technical Analysis: Australian Dollar vs Canadian Dollar

Momentum has turned lower on AUD/CAD after a very brief parity party – and with traders less certain of RBA hikes, the cross has the potential to move lower. Note that the AU–CA two-year yield spread is heading lower ahead of prices as markets continue to reprice relative expectations between the RBA and BoC.

Last week’s candle wasn’t quite a bearish engulfing – but it was close enough. The daily chart shows a shooting star candle on Thursday and a lower high, ahead of a direct break beneath the monthly pivot point down to monthly S1. While AUD/CAD is showing signs of support around S1, bears may be seeking to fade minor rallies within Thursday’s bearish candle in anticipation of a move down to the April 2021 high or 200-day EMA. A break beneath these levels would bring the 50-week EMA into focus near the 0.97 handle.

Source: ICE, TradingView

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