Canadian Inflation Misses, USD/CAD Steadies Near 1.3761 Amid Diverging Central Bank Signals

The US Dollar (USD) stabilizes against the Canadian Dollar (CAD) on Monday following Canada’s softer-than-expected inflation reading, with USD/CAD trading around 1.3761 after dipping to an intraday low of 1.3747. The weaker headline price growth from Canada has eased buying pressure on the Loonie, even as the Greenback faces headwinds across broader currency markets. Meanwhile, traders monitoring cross-currency dynamics are also watching USD to AUD movements, as the US dollar fluctuates across multiple pairs amid shifting economic expectations.

Canadian Inflation Data Signals Policy Hold

Statistics Canada released November inflation data on Monday showing headline CPI climbed 2.2% year-over-year, matching October’s reading but falling short of the 2.4% forecast that markets had priced in. The monthly inflation increase slowed to 0.1% from 0.2%, signaling a deceleration in price pressures. The Bank of Canada’s core inflation measures painted a more complex picture—core CPI remained flat at 2.9% annually while contracting 0.1% on a monthly basis, a sharp reversal from October’s 0.6% monthly gain.

This softer inflation backdrop aligns with the Bank of Canada’s recent decision to hold its policy rate steady at last week’s meeting. Central bank officials signaled the current rate level is “about the right level,” citing inflation hovering near the 2% target and evidence of economic resilience. The tame price data removes pressure for immediate rate cuts while justifying the cautious approach policymakers have maintained through late 2024.

US Economic Calendar Highlights Growing Uncertainty

The United States faced a disappointing manufacturing report on Monday, with the New York Empire State Manufacturing Index plunging to -3.9 in December from November’s 18.7—significantly undershooting the 10.6 consensus expectation. This sharp downturn suggests factory activity momentum is stalling as year-end approaches, adding to concerns about broader economic momentum heading into 2026.

The week ahead brings critical US economic releases that will likely reshape market expectations for Federal Reserve policy. The delayed October and November Nonfarm Payrolls report arrives Tuesday, followed by the December Consumer Price Index reading on Thursday. These data points will be instrumental in determining whether the Fed maintains its current holding pattern or considers additional policy adjustments. The USD to AUD relationship, along with other currency pairs, will likely respond sharply to these employment and inflation figures.

Currency Market Snapshot

The US Dollar showed mixed performance across major currency pairs on the session. Against the Japanese Yen (JPY), USD strengthened 0.59%, marking its best relative performance. The Greenback weakened modestly against the Euro (EUR) and British Pound (GBP), down 0.12% and 0.19% respectively, while holding essentially flat against CAD at -0.01%. The New Zealand Dollar (NZD) was the top performer against USD, gaining 0.09%, though this varies when looking at USD to AUD conversions where the Australian Dollar (AUD) showed minimal movement at 0.01% depreciation.

Currency heat maps reveal the cross-rate complexity traders are navigating. EUR/JPY pushed to a 0.47% appreciation, while GBP/JPY advanced 0.37%, reflecting broader yen weakness. For CAD traders, the pair remains relatively stable at current levels, providing a window of reduced volatility before major US data points reshape market positioning across all currency pairs including the AUD/USD relationship.

Market Outlook

USD/CAD traders face a critical week as US employment and inflation data take center stage. The Greenback’s trajectory against the Loonie will hinge on whether upcoming data points justify continued Fed pause expectations or force a reassessment of 2026 policy prospects. Currency market volatility is likely to tick higher as these releases hit, with spillover effects across the USD to AUD pair and all major exchange rates. The Bank of Canada’s measured stance provides some support for CAD, though external US developments may ultimately drive the near-term direction for this and related currency pairs.