Canadian inflation rate a non event

Although it’s a light day for data out of the States ahead of the American long weekend, Canada read its monthly CPI print, which has had a somewhat muted effect on the market. Consumer prices were stable in January, coming in at 0.3% on the month, right on expectations. This translates into a 2.3% rise in the last 12 months. However, the core rate, which excludes more volatile items from the calculation, was flat at 0.0% on the month, leading to a year-over-year rate of 1.4%. Although the currency reaction would tell you otherwise, this is a bearish sign for the Canadian dollar from an interest rate perspective, as it buys the Bank of Canada some time before they need to action any further increases to contain price pressures. Clearly inflation is not yet a measurable concern for the country—and although it looms on the horizon with rates still at historic lows and accommodative policy from Canada and the US starting to filter its way down the economy, we are still a few months away from a rate hike in Canada. Many economists are predicting a May hike if inflation picks up in Q2. This is consistent with the data, but it could be argued that risks are to the downside as far as the timeline is concerned. Although stability has been achieved, Canada is hampered by growth in the US and Europe and this might continue to keep price pressures in line well past the spring.

As for the currency: as noted, the market reaction was benign. Price action has been consolidative under the 0.9850 mark, and the slow grind to 0.9820, which we have now seen twice in the last two days, has been anything but exciting. There is certainly a sense of uncertainty as far as the Loonie is concerned. It has established itself over par (USDCAD under par), and the range that once was 1.00-1.02 has now dropped lower. However, at these levels there is much buying interest, as many do not want to miss the boat on the move, and the fundamentals are not entirely supportive of continued strength in Canada from here. Nonetheless, risk sentiment continues to remain buoyant, putting upward pressure on the northern dollar, and with a break of the 0.98 mark, we could see further losses for the Greenback. Let’s not forget the time prior to the financial crisis, when USDCAD fell very quickly to 0.90 before rebounding right back to par within a matter of months.