It’s Canada’s turn to print the latest set of CPI readings soon!
How might these updates affect central bank policy bias and CAD price action?
Focus on the event:
Canadian 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% against the previous 0.7%
- Cost per public/public address install: 3.4% compared to the previous 4.4%
- Basic CPI m/m: 0.5% compared to the previous 0.5%
- Average cost per y/y installation: 4.0% compared to the previous 4.2%
- Truncation of average CPI y/y: 4.0% compared to the previous 4.2%
Related data since the last data event/release:
- May Industrial Product Price Index (IPPI) It decreased from -0.6% negatively adjusted to -1.0% on a monthly basis
- May Raw Material Price Index (RMPI) Decreased 4.9% m/m vs expected increase of 1.7%
- May New Home Price Index (NHPI) It posted a 0.1% m/m increase vs. the flat estimated reading and previous decline of 0.1%.
- May Ivy PMI It fell to a three-month low of 53.5 against an estimated improvement from 56.8 to 57.2, although the price index rose from 59.0 to 60.3.
- S&P Global Manufacturing Index May It fell from 50.2 to 49.0 to reflect a contraction in the industry, as the index of employment and prices paid for inputs fell
Previous editions and the impact of the risk environment on CAD
May 16, 2023
Event Results/Price Action:
Canada posted stronger-than-expected inflation data for April, posting a 0.7% m/m rise in the core CPI after a previous 0.5% rise. This translates to a slight uptick from 4.3% yoy in March to 4.4% in April.
The Canadian dollar had already had a strong start to the week, supported by higher oil prices, and continued to rally after Bank of Canada President McCullum said it was too early to talk about interest rate cuts.
Risk Environment and Internal Market Behaviors:
Fading fears of a global recession also helped lift higher-yielding assets during the May trading week, allowing crude oil prices to make the most of the IEA’s improved demand outlook.
US debt ceiling concerns also eased when House Speaker McCarthy appeared optimistic a deal could be struck the following week.
April 18, 2023
Event Results/Price Action:
Canadian CPI monthly reading for March turned out slightly stronger than expected at 0.5% m/m vs. previous reading of 0.4% and consensus of 0.3%.
However, the Canadian dollar was stuck in a steady downtrend all week and finished last against its forex peers. The decline in crude oil prices, in addition to the rumors that the Bank of Canada (BOC) may be preparing to cut interest rates sooner or later, have greatly affected the Canadian currency.
CAD even ignored remarks by BOC Governor Macklem, who noted he was “encouraged” by slowing inflation but stressed “The importance of maintaining course and restoring price stability.“
Risk Environment and Internal Market Behaviors:
Risk-off flows have been in play for much of this trading week, keeping safe-haven assets and lower-yielding currencies like the franc and dollar in the top positions.
The dollar’s strength was also driven by the Fed’s hawkishness, although the prospect of monetary tightening kept traders wary of a potential recession.
It didn’t help risky assets that global PMI readings highlighted stubborn price pressures while also revealing weaknesses in sentiment, leading market watchers to worry that higher borrowing costs could do more harm than good.
Price action odds:
Possibilities of feeling risky:
The trading week started off a little slow and broad market volatility is likely to remain muted as the Canadian CPI release is set to be the first tier 1 catalyst to print, barring any major surprises.
Risk-off sentiment appears to be anealing after the downgrade of China’s GDP forecast, combined with stubborn inflation increasing the odds of further tightening moves. Underwhelming stimulus efforts by the People’s Bank of China (PBOC) are keeping traders on edge and once again, with no major catalysts expected on Monday or Tuesday, risk aversion sentiment may hold through the Canadian CPI update.
Canadian dollar scenarios:
Possible base scenario:
Most of the major indicators are pointing to the possibility of a decrease in price pressures for the month of May, which could spur expectations of another BOC pause in the next interest rate statement.
Remember, the central bank surprised the markets with a 0.25% interest rate hike in its latest policy announcement, after consecutive months of keeping interest rates unchanged at 4.50%.
Weak inflation may be enough to convince policy makers to get their hands on the July decision, which could lead to some decline in the Canadian dollar.
In this scenario, look for opportunities to sell the CAD against currencies with more hawkish central banks (GBP, EUR, AUD) or sell the CAD against the dollar or franc if risk aversion flows pick up.
Possible alternative scenario:
Another bullish surprise in the inflation figures could revive concerns about stubborn price pressures, which would likely prompt the Canadian dollar bulls to hike rates on a BoC basis for July.
If so, be prepared to buy Canadian dollars against currencies with pessimistic central banks (the Japanese yen) or those with hawkish biases (the New Zealand dollar).
