Image source: iStock
Statistics Canada just released its monthly report covering the most recent inflationary changes in the country. According to the findings of the survey, Canada's headline inflation rate has contracted to -0.4 per cent in May.
The result is below the consensus market expectations. It also measures a 0.2 per cent deterioration from a month prior. In light of this recorded worsening of Canada's price stability over the last two months, the country's economy is now technically exposed to deflationary pressures.
Canada Inflation Rate. Image source: TradingEconomics.com
Due to these concerning developments, the BOC might have to ramp up its asset-purchasing programs in order to bolster aggregate demand in the primary and secondary markets, similar to what the Federal Reserve is already doing in the US.
The weakening price stability could be attributed to unreasonably tight monetary policy in the context of muffled financial conditions and uncertain prospects for growth.
The Bank of Canada was the first major financial institution to scale down its QE programs, all the while every other central bank is loosening. The justification of this decision becomes especially difficult given the rising unemployment and falling national output.
One glimmer of hope for a quick reverse of this tendency is encompassed by the stabilising energy market, albeit at a moderate pace. Canada is one of the biggest producers and exporters of crude oil, which means that the inflationary pressures are going to normalise with the strengthening of the precious commodity's price.
However, this process could prove to be quite arduous and protracted, which means that the BOC is likely to intervene soon, in order to foster quicker recovery. Given all of the aforementioned economic data, the Bank is expected to reconcile a new monetary policy stance, complemented by broadened asset purchase programs.
Meanwhile, the Canadian dollar was left mostly unscathed in the immediate aftermath of the news' publication. The USDCAD pair continues to consolidate in a narrow range, as we pointed out in our analysis from earlier today.
As can be seen on the hourly chart below, the price action remains concentrated around the minor support level at 1.35320. These muted fluctuations are likely to persist until the broader retracement (see the analysis) is concluded.
Afterwards, the price action would be free to continue trending.
USDCAD 1H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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