Will Canadian CPI data keep the loonie’s rally alive? – Forex News Preview
June 23, 2023 12:27 pm
Sticky inflation is prompting central banks to think twice about pausing and CPI numbers out of Canada on Tuesday (12:30 GMT) could determine whether the Bank of Canada decides to hike rates again after unpausing in June. The BoC’s hawkish tilt at its last meeting fuelled the Canadian dollar’s rally since the beginning of June even as crude oil prices remained muted, so the ground is ripe for further gains if the CPI data comes in hotter than expected.
Inflation is creeping up again
The Bank of Canada hiked very aggressively at the start of its tightening cycle and this approach appears to have borne fruit as inflation peaked a year ago at 8.1%, avoiding hitting double digits like it did in Europe. But more recently, progress appears to be stalling. The headline rate of the consumer price index edged up unexpectedly to 4.4% year-on-year, while underlying inflation has not been declining fast enough.
Headline CPI possibly fell back slightly in May but held above 4.0%. For the Bank of Canada, what happens to the core measures will be just as important. CPI common stood at 5.7% in April, which is much higher than CPI median and CPI Trim, both at 4.2%. Should they continue to remain elevated in May, or even tick higher, the Bank of Canada might feel compelled to raise interest rates for the second straight meeting when it next convenes in July.
Economy could be slowing after Q1 bounce
But it’s not inflation alone that will influence policymakers’ decision. In the June statement, the Bank pointed to overall demand in the economy being too strong and therefore policy not being restrictive enough. But that outlook largely relied on the solid rebound in growth in the first quarter and the economic picture has changed slightly since the June 7 meeting as days later, jobs data showed employment falling in May for the first time since August 2022, and housing starts also slumped in the same period.
The monthly GDP reading due on Friday should provide further clues as to whether there was a notable deterioration in growth at the start of the second quarter.
Loonie could stretch its advance on hot CPI
If the inflation figures do not surprise to the upside this time, the Bank of Canada might hold rates steady in July to allow for more time to see how the economy is going to evolve over the summer. However, with a 25-basis-point increase about 70% priced in by investors, the Bank doesn’t have to worry about shocking the markets by hiking rates again, so the bar is set quite low.
Dollar/Loonie is currently hovering around the 61.8% Fibonacci retracement of the August 2022-October 2022 uptrend, which falls in the 1.32 region. A strong CPI report could see the pair breaking below this level to head for the 1.30 mark, which is near the 78.6% Fibonacci.
Fed pause may limit loonie’s downside
However, if the inflation data is significantly on the soft side, easing the urgency on policymakers to act so soon after the last hike, dollar/loonie could bounce higher to test the congestion region between 1.33 and 1.3350 (50% Fibonacci). There are more obstacles ahead with the 50- and 200-day moving averages towering above. These will be difficult to overcome for the US dollar if the Fed stays on pause, even if the Bank of Canada also keeps its policy settings unchanged.
Hence, the loonie’s prospects are unlikely to worsen much against the greenback in the event of disappointing data as long as investors remain convinced that the Fed at best will only hike one more time.
Sticky inflation is prompting central banks to think twice about pausing and CPI numbers out of Canada on Tuesday (12:30 GMT) could determine whether the Bank of Canada decides to hike rates again after unpausing in June. The BoC’s hawkish tilt at its last meeting fuelled the Canadian dollar’s rally since the beginning of June even as crude oil prices remained muted, so the ground is ripe for further gains if the CPI data comes in hotter than expected.
Inflation is creeping up again
The Bank of Canada hiked very aggressively at the start of its tightening cycle and this approach appears to have borne fruit as inflation peaked a year ago at 8.1%, avoiding hitting double digits like it did in Europe. But more recently, progress appears to be stalling. The headline rate of the consumer price index edged up unexpectedly to 4.4% year-on-year, while underlying inflation has not been declining fast enough.
Headline CPI possibly fell back slightly in May but held above 4.0%. For the Bank of Canada, what happens to the core measures will be just as important. CPI common stood at 5.7% in April, which is much higher than CPI median and CPI Trim, both at 4.2%. Should they continue to remain elevated in May, or even tick higher, the Bank of Canada might feel compelled to raise interest rates for the second straight meeting when it next convenes in July.
Economy could be slowing after Q1 bounce
But it’s not inflation alone that will influence policymakers’ decision. In the June statement, the Bank pointed to overall demand in the economy being too strong and therefore policy not being restrictive enough. But that outlook largely relied on the solid rebound in growth in the first quarter and the economic picture has changed slightly since the June 7 meeting as days later, jobs data showed employment falling in May for the first time since August 2022, and housing starts also slumped in the same period.
The monthly GDP reading due on Friday should provide further clues as to whether there was a notable deterioration in growth at the start of the second quarter.
Loonie could stretch its advance on hot CPI
If the inflation figures do not surprise to the upside this time, the Bank of Canada might hold rates steady in July to allow for more time to see how the economy is going to evolve over the summer. However, with a 25-basis-point increase about 70% priced in by investors, the Bank doesn’t have to worry about shocking the markets by hiking rates again, so the bar is set quite low.
Dollar/Loonie is currently hovering around the 61.8% Fibonacci retracement of the August 2022-October 2022 uptrend, which falls in the 1.32 region. A strong CPI report could see the pair breaking below this level to head for the 1.30 mark, which is near the 78.6% Fibonacci.
Fed pause may limit loonie’s downside
However, if the inflation data is significantly on the soft side, easing the urgency on policymakers to act so soon after the last hike, dollar/loonie could bounce higher to test the congestion region between 1.33 and 1.3350 (50% Fibonacci). There are more obstacles ahead with the 50- and 200-day moving averages towering above. These will be difficult to overcome for the US dollar if the Fed stays on pause, even if the Bank of Canada also keeps its policy settings unchanged.
Hence, the loonie’s prospects are unlikely to worsen much against the greenback in the event of disappointing data as long as investors remain convinced that the Fed at best will only hike one more time.
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