It’s Canada’s turn to print its latest batch of CPI readings soon!
How could these updates potentially impact their central bank’s policy bias and CAD price action?
Event in Focus:
Canada’s Consumer Price Index (CPI) and inflation data for May 2023
When Will it Be Released:
June 27, 2023 (Wednesday), 12:30 pm GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
- Headline CPI m/m: 0.5% vs. 0.7% previous
- Headline CPI y/y: 3.4% vs. 4.4% previous
- Core CPI m/m: 0.5% vs. 0.5% previous
- Median CPI y/y: 4.0% vs. 4.2% previous
- Trimmed mean CPI y/y: 4.0% vs. 4.2% previous
Relevant Data Since Last Event/Data Release:
- May industrial product price index (IPPI) down from negatively revised -0.6% to -1.0% month-over-month
- May raw materials price index (RMPI) slumped 4.9% month-over-month vs. projected 1.7% increase
- May new housing price index (NHPI) posted 0.1% uptick month-over-month vs. estimated flat reading and earlier 0.1% decline
- May Ivey PMI fell to three-month low of 53.5 vs. estimated improvement from 56.8 to 57.2, although prices index rose from 59.0 to 60.3
- May S&P Global manufacturing index dropped from 50.2 to 49.0 to reflect industry contraction, as employment index and prices paid for inputs declined
Previous Releases and Risk Environment Influence on CAD
May 16, 2023
Event results / Price Action:
Canada printed stronger than expected inflation data for April, reporting a 0.7% month-over-month increase in headline CPI after the earlier 0.5% gain. This translated to an uptick from 4.3% year-over-year in March to 4.4% in April.
The Loonie was already off to a strong start for the week, as it was buoyed by higher oil prices, and the rally carried on after BOC head Macklem said that it was too early to talk about interest rate cuts.
Risk environment and intermarket behaviors:
Fading fears of a global recession also helped lift higher-yielding assets throughout this May trading week, allowing crude oil prices to benefit most from upgraded IEA demand forecasts.
U.S. debt ceiling concerns also eased when House Speaker McCarthy sounded optimistic that a deal could be struck the following week.
April 18, 2023
Event results / Price Action:
Canada’s monthly CPI read for March turned out slightly stronger than expected at a 0.5% month-over-month gain versus the earlier 0.4% reading and the 0.3% consensus.
However, the Loonie was stuck in a steady downtrend throughout the week and finished in last place against its forex peers. Declining crude oil prices, as well as rumors that the BOC might be gearing up for rate cuts sooner or later, weighed heavily on the Canadian currency.
CAD even shrugged off remarks from BOC Governor Macklem, who cited that he’s “encouraged” by slower inflation but emphasized the “importance of staying the course and restoring price stability.”
Risk environment and intermarket behaviors:
Risk-off flows were very much in play for the most part of this trading week, keeping safe-haven assets and lower-yielding currencies like the franc and dollar in the top spots.
Dollar strength also ensued from the Fed’s hawkish bias, although the prospect of tighter monetary policy kept traders wary of a potential recession.
It didn’t help risk assets that global PMI readings highlighted stubborn price pressures while also revealing weak spots in sentiment, prompting market watchers to worry that higher borrowing costs might do more harm than good.
Price action probabilities:
Risk sentiment probabilities:
The trading week is off to a bit of a slow start and broad market volatility will likely remain muted as the Canadian CPI release is slated to be the first top-tier catalyst to be printed, barring any big surprises.
Risk-off vibes seem to be the lean after downgraded Chinese GDP forecasts, along with stubborn inflation upping the odds of more tightening moves. Underwhelming stimulus efforts from the PBOC are also keeping traders on edge, and again, with no major expected catalysts Monday or Tuesday, risk-off vibes may hold through the Canadian CPI update.
Canadian dollar scenarios:
Potential Base Scenario:
Most leading indicators are pointing to a potential drop in price pressures for May, possibly prompting expectations for another BOC pause in their next rate statement.
Recall that the central bank surprised the markets with a 0.25% rate hike in their latest policy announcement, following back-to-back months of keeping rates unchanged at 4.50%.
Weakening inflation could be enough to convince policymakers to sit on their hands for the July decision, probably bringing some downside for the Loonie.
In this scenario, look out for opportunities to sell CAD against currencies with more hawkish central banks (GBP, EUR, and AUD) or for a Loonie selloff against the dollar or franc if risk-off flows pick up.
Potential Alternative Scenario:
Another upside surprise in inflation figures could revive concerns about stubborn price pressures, likely leading Loonie bulls to price in another BOC hike for July.
If that’s the case, be ready to go long CAD against currencies with dovish central banks (JPY) or those with not-so-hawkish biases (NZD).
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