Hot US CPI Data Drives Loonie to Lowest Level in 18 Months

The greenback strengthened broadly on the day, briefly driving it to its highest level versus the loonie since April 2025. That peak stood at 1.4299, equivalent to 0.6993 CAD. The 70-cent threshold carries domestic significance, and a clear breach of that mark might offer Canadians yet another incentive to avoid traveling to the US this winter.

The Canadian dollar had recovered strongly the previous day, reversing the weakness that followed the jobs report. On Friday, Canadian employment unexpectedly fell, but on closer inspection the losses came from government jobs in healthcare and education. That education category is especially difficult to adjust seasonally in September because schools reopen, and neither sector points to underlying economic health. Still, signals from the Canadian economy have been mixed, and housing across much of the country seems to be undergoing another downturn.

The more intriguing aspect is how the central banks are responding. Over the next twelve months, markets have priced in 97 basis points of tightening for the Bank of Canada and 92 basis points for the Federal Reserve. The latest US CPI data reduced that differential, and if Canada's economy falters or the US strengthens further, a genuine USD-supportive divergence could emerge.

The base rates themselves are already far apart: the Fed sits at 3.75-4.00% versus the Bank of Canada's 2.25%. That gap widens along the curve, with US Treasuries yielding significantly more than Canadian government bonds.

The pair is moving past the highs seen in 2026. That leaves little resistance until the Liberation Day peaks near 1.45-1.47 start to matter.

Should the exchange rate reach the mid-1.40s, a bearish stance against that resistance would be tempting, given expectations that money will leave the US once the AI boom fades. Improved trade ties between Canada and the US could also reverse the pair's direction.

Looking at fundamentals, commodity prices have provided a buffer for the Canadian dollar. However, the discount on Western Canadian Select crude has widened sharply lately, so Canadian producers are mostly missing out on global oil prices. Prime Minister Carney unveiled plans for a new pipeline to the west coast, but construction will take five to ten years following the customary court battles and lawsuits in Canada.

Regarding oil, medium-term risks lean to the downside if the US or Iran is compelled to agree to a peace deal in the Strait of Hormuz. The view here is that the timeline for 'normalized' oil prices is extended due to the substantial inventory rebuilding still required, though any peace agreement would be negative for oil for a period.

On the consumer side, spending has remained resilient in both countries, and RBC released new Canadian cardholder data for September. The bank reported that spending rose 0.5% month-over-month, driven by discretionary categories. Entertainment and arts outlays climbed 1.4%, travel spending increased 1%, and dining saw a more muted gain of 0.3%.

Elevated gasoline prices are clearly eating into household budgets, but consumer spending has not broken yet, which could provide the Bank of Canada with reason to tighten further. The writer is doubtful that the central bank will deliver the four full rate increases priced into the curve through 2027.