Canadian data could refocus the confused loonie on the real economy – Forex News Preview
March 17, 2023 11:27 am
Following a wild 10-day period with record-breaking moves, market participants and central bankers hope that the focus next week will return to the real economy. In the case of Canada, we get two significant pieces of data, CPI and retail sales, that under normal conditions would have the potential to determine the loonie’s fate in the short-term. But developments elsewhere, especially in Europe, could quickly cast a shadow over this economic news.
Bank of Canada officials must be relieved by their pause move
At the March 8 meeting the BoC opted to pause at 4.5%, after a total of 425 bps of rate hikes. Under normal market conditions this announcement could have proven to be a key moment in the market’s mentality and potentially impact the then-ballooning market expectations, but the focus shifted quickly on the US banking sector. Developments since then have been cataclysmic with the BoC officials probably feeling satisfied with their pause decision, giving them valuable time to evaluate the unfolding situation until their next meeting on April 12.
In this context, on Wednesday we get the second “Summary of Deliberations” from the BoC. This is a new publication coming two weeks after each respective meeting in an attempt to increase the transparency and the public’s understanding surrounding the interest rate decisions. This new addition matches an already established practice by the next-door neighbor, the US Fed.
“Minutes” on Wednesday
The first release of this summary on February 8 revealed the BoC’s dilemma on staying put or announcing a 25 bps rate hike, which was eventually the case at the January meeting. Hence, Wednesday’s release could provide valuable information on their insightful decision to pause their rate hiking cycle. And particularly, their assessment on the domestic developments, where any indication of an inflation resurgence could force a reopening of Pandora’s box. But we need to take into consideration that, similar to the ECB’s staff projections, the last BoC meeting took place before the recent market rout and hence their discussion could be significantly out-of-date.
Inflation to accelerate?
Over the past ten days we have seen some key economic releases that could trouble the BoC going forward. With unemployment remaining at record-low levels, the March 10 average hourly wages must have alarmed the BoC officials. The dip in late 2022/early 2023 has been interrupted as the February year-on-year increase reaccelerated to 5.4%, raising the possibility that we might not have seen the peak in inflation yet. On Tuesday, we get the inflation prints for February and a possible downside surprise in the headline figure, similar to the one seen in the January numbers, would clearly kick off a party at the BoC halls. On the other hand, an acceleration in the YoY prints will not be a pleasant reading considering the arising financial stability risks in both the US and Euro area. At this stage, the bar for further rate hikes is considerably higher than in early March, which on the margin suits the less-hawkish central banks like the BoC.
Retail sales key going forward
One of the indicators expected to remain in the spotlight going forward is retail sales. This dataset has been followed closely by market participants and central bankers over the past two years. And this interest could potentially heighten on Friday if Tuesday’s CPI print indeed delivers an upside surprise. Coupled with the stronger average hourly wages, there is an increasing probability for strong retail sales figures, but most likely not in the January numbers we get on Friday morning.
Could the loonie bulls stop the euro advance?
The loonie has been under severe pressure against the euro since August 25 with the pair reaching 1.4781 on March 13, the highest level since September 2021. A small pullback has since taken place, but it stopped at the well-respected November 4, 2022 upward trendline. Actually, since December 6 the euro/loonie has been trading inside a wide rectangle with the mid-March move higher proving to be a false breakout. A similar pattern formed in the October 2021 – February 2022 period when, following two failed breakouts, the pair finally broke downwards and opened the door for the 10-year low of 1.2785 seen on August 25. At the current juncture, loonie bulls would have to deal with the upward trendline and the 50-day simple moving average before looking at the busier 1.4258 area.
Following a wild 10-day period with record-breaking moves, market participants and central bankers hope that the focus next week will return to the real economy. In the case of Canada, we get two significant pieces of data, CPI and retail sales, that under normal conditions would have the potential to determine the loonie’s fate in the short-term. But developments elsewhere, especially in Europe, could quickly cast a shadow over this economic news.
Bank of Canada officials must be relieved by their pause move
At the March 8 meeting the BoC opted to pause at 4.5%, after a total of 425 bps of rate hikes. Under normal market conditions this announcement could have proven to be a key moment in the market’s mentality and potentially impact the then-ballooning market expectations, but the focus shifted quickly on the US banking sector. Developments since then have been cataclysmic with the BoC officials probably feeling satisfied with their pause decision, giving them valuable time to evaluate the unfolding situation until their next meeting on April 12.
In this context, on Wednesday we get the second “Summary of Deliberations” from the BoC. This is a new publication coming two weeks after each respective meeting in an attempt to increase the transparency and the public’s understanding surrounding the interest rate decisions. This new addition matches an already established practice by the next-door neighbor, the US Fed.
“Minutes” on Wednesday
The first release of this summary on February 8 revealed the BoC’s dilemma on staying put or announcing a 25 bps rate hike, which was eventually the case at the January meeting. Hence, Wednesday’s release could provide valuable information on their insightful decision to pause their rate hiking cycle. And particularly, their assessment on the domestic developments, where any indication of an inflation resurgence could force a reopening of Pandora’s box. But we need to take into consideration that, similar to the ECB’s staff projections, the last BoC meeting took place before the recent market rout and hence their discussion could be significantly out-of-date.
Inflation to accelerate?
Over the past ten days we have seen some key economic releases that could trouble the BoC going forward. With unemployment remaining at record-low levels, the March 10 average hourly wages must have alarmed the BoC officials. The dip in late 2022/early 2023 has been interrupted as the February year-on-year increase reaccelerated to 5.4%, raising the possibility that we might not have seen the peak in inflation yet. On Tuesday, we get the inflation prints for February and a possible downside surprise in the headline figure, similar to the one seen in the January numbers, would clearly kick off a party at the BoC halls. On the other hand, an acceleration in the YoY prints will not be a pleasant reading considering the arising financial stability risks in both the US and Euro area. At this stage, the bar for further rate hikes is considerably higher than in early March, which on the margin suits the less-hawkish central banks like the BoC.
Retail sales key going forward
One of the indicators expected to remain in the spotlight going forward is retail sales. This dataset has been followed closely by market participants and central bankers over the past two years. And this interest could potentially heighten on Friday if Tuesday’s CPI print indeed delivers an upside surprise. Coupled with the stronger average hourly wages, there is an increasing probability for strong retail sales figures, but most likely not in the January numbers we get on Friday morning.
Could the loonie bulls stop the euro advance?
The loonie has been under severe pressure against the euro since August 25 with the pair reaching 1.4781 on March 13, the highest level since September 2021. A small pullback has since taken place, but it stopped at the well-respected November 4, 2022 upward trendline. Actually, since December 6 the euro/loonie has been trading inside a wide rectangle with the mid-March move higher proving to be a false breakout. A similar pattern formed in the October 2021 – February 2022 period when, following two failed breakouts, the pair finally broke downwards and opened the door for the 10-year low of 1.2785 seen on August 25. At the current juncture, loonie bulls would have to deal with the upward trendline and the 50-day simple moving average before looking at the busier 1.4258 area.
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