Event Guide: Canada’s CPI Report (October 2023)

Greetings, fellow Loonie traders!

Canada is set to release a fresh set of CPI data on Tuesday, which may significantly impact sentiment on the Bank of Canada’s monetary policy outlook.

What are the forecasts, and what may be the Canadian dollar’s next move?

Event in Focus:

Canada’s Consumer Price Index (CPI) and inflation data for October 2023

When Will it Be Released:

November 21, 2023 (Tuesday), 1:30 pm GMT

Use our Forex Market Hours tool to convert GMT to your local time zone.

Expectations:

Headline CPI m/m: 0.2% m/m forecast; -0.1% m/m previous

Headline CPI y/y: 3.3% y/y forecast; 3.8% y/y previous

Median CPI y/y: 3.5% y/y forecast; 3.8% y/y previous

Trimmed CPI y/y: 3.4% y/y forecast; 3.7% y/y previous

Core CPI y/y: 2.6% y/y forecast;  2.8% y/y previous

Expectations as of Nov. 20, 4:00 pm GMT

Relevant Data Since Last Event/Data Release:

Average average hourly wages rose 4.8% y/y in October vs. 5.0% y/y in September

Ivey PMI Prices Index in October was 60.0 vs 67.3 previous

S&P Global manufacturing PMI for October: “Overall, input prices rose to the steepest degree since April. There were reports that an increase in the  rice of fuel was the principal contributing factor behind higher input costs.  that said, firms also noted that suppliers were again willing to raise their  charges despite weaker demand for their goods. Once again, manufacturers  responded by passing on a proportion of their increased costs to clients in  the form of higher charges. Output price inflation was solid overall, and a  little firmer than September’s three-month low.

S&P Global Canada Services PMI for October: “Price data showed the continuation of elevated inflation, with operating expenses rising to the greatest degree since February. Charges also rose at a steeper pace, though to a much lower degree than seen for input costs.”

Previous Releases and Risk Environment Influence on CAD

October 17, 2023

Event results / Price Action:

In October, Canada reported the headline CPI rate for September was at -0.1% m/m (0.5% m/m forecast; 0.4% m/m previous); core CPI was -0.1% m/m (0.3% m/m forecast; 0.1% m/m previous). This event sparked an initial sell off in the Canadian dollar against the majors, and likely with help of several net negative Canadian economic updates, pushed the Loonie lower overall through the end of the week.

Risk environment and intermarket behaviors:

This particular trading week was mixed as traders tried to balance Middle East conflict developments, inflation updates and central bank actions. The usual correlations were thrown off due to individual asset drivers outweighing broad risk sentiment, leading to gains in crypto, bond yields, oil and gold at the end of the week.

September 19, 2023

Event results / Price Action:

In September, the Canada CPI read for August came in at 4.0% y/y (3.9% y/y forecast; 3.3% y/y previous), with the Core CPI read at 3.3% y/y (3.5% y/y forecast; 3.2% y/y previous).  The monthly read was better-than-expected at 0.4% m/m vs. 0.2% forecast/ 0.6% previous, and the core CPI read fell from 0.5% m/m to 0.1% m/m.

It appeared that the markets took long position profits on what was a mixed but slightly better-than-expected consumer inflation update. Fortunately for CAD bulls, it seems to have been enough to keep a big under the Loonie overall through the rest of the week, but counter currency flows and a late bounce in oil were likely drivers for the Loonie’s gains as well.

Risk environment and intermarket behaviors:

The broad risk environment was generally mixed this particular trading week as traders were on the sidelines early, awaiting a very heavy central bank event calendar (most notably the Fed’s latest monetary policy decision). Most assets were also moving on their own particular drivers, including business sentiment survey and inflation updates.

Overall, it was a generally risk-off vibe, but high inflation / interest rate themes also held strong, characterized by another strong in bond yields in the latter half of the week.

Price action probabilities:

Risk sentiment probabilities: 

It looks like markets have kicked off the new week with the same vibes as last week, which leaned heavily somewhat risk-on and anti-Dollar. Speculation of a peak inflation environment /central bank rate hike cycle (and potential 2024 rate cuts) seems to continue to be the main driver, but a cloudy picture remains with some economies signaling weakness ahead, while others remain resilient against high inflation / interest rate conditions.

Individual asset stories seem to be getting a lot of weight lately as well, weakening the usual broad market correlations. Equities and gold seems to continue to find bids on falling bond yields / U.S. dollar, while oil is reacting to OPEC+ production cut speculation vs. rising inventories data.

This week’s broad risk vibes will likely be influenced by central bank events on the calendar, most notably the FOMC meeting minutes on Wednesday. The upcoming round of flash business survey data will also likely be a market driver at the end of the week, likely signaling continued contractionary conditions across most of the globe.

Canadian dollar scenarios:

Potential Base Scenario:

Market expectations for the upcoming consumer prices update from Canada seem to lean towards showing lower rates of prices rising, which on an annualized basis has been the slow trend for the year. On a month-to-month basis, the data has been pretty choppy, characterized by surprisingly strong headline inflation reads for July and August, but an actual deflation reading in September.

At the moment, the Loonie is moving broadly lower against the majors, and given that broad risk sentiment seems to be net positive and oil is moving higher, FX traders may be pricing in lower Canadian inflation rates at the moment.

If this continues going into the event and the actual numbers come out as expected, there may be some short-term profit taking from short positions, highly dependent on how big/small of a difference the actual read is vs. forecast / previous reads.

If the above “buy-the-rumor, sell-the-news” scenario does play out, the Loonie may draw in sellers after a bounce and if bearish reversal patterns appears, potentially similar to the October release. The counter currencies that may create the highest quality setups are those of central banks who have been relatively hawkish (i.e., keeping the door open to hikes) with their interest rate outlook (like the euro and the Swiss franc), or countries with surprisingly strong economic data (like the Aussie).

Alternative Scenario:

The monthly headline CPI data does have a history of surprising market players, and if we see a scenario of higher-than-expected monthly CPI rates AND the Loonie continues to move lower ahead of the event, then the odds are pretty good we may get a big bounce as traders reprice the event.

Again, the degree to which the actual read differs from expectations / previous reads matter, so a good practice with this event is likely to wait for the data to release, see and assess the actual read before developing a short-term directional bias on the Loonie.

As we saw in the past two releases, the Loonie formed a trend in both cases that persisted through the rest of the week. Unless we get a major oil or macro shock, this trending type behavior may develop, so jumping in right after the event is not likely a crucial factor to potentially see a positive outcome.

So, a little bit of uncertainty means risk management planning and execution will have a bit more weight towards achieving a positive outcome. Don’t skimp on taking the time to make sure you have a quality trade with a favorable reward-to-risk ratio!