Canadian Inflation Reaccelerates in both Headline and Core Data

The latest Canadian inflation numbers are in, and they were largely hotter than expected. This consequently underpinned the Canadian dollar (CAD) and prompted investors to pare back rate cut expectations.

According to Statistics Canada, headline consumer price inflation rose +2.9% in the twelve months to May, up from +2.7% in April and bettered the +2.6% market estimate.

The acceleration in inflation is largely bolstered by an increase in services prices (up +4.6% in May from +4.2% in April) and goods inflation (up +1.0% in May, matching April).

Cellular services, rent (the national rent index increased to nearly +9.0% for May YoY, up from +8.2% in April), mortgage costs (rates increased 22.3% in May YoY), travel tours (+10.4% MoM), and air transportation were also clear drivers of price growth.

Between April and May, headline inflation rose +0.6%, surpassing the market consensus of +0.3% and the +0.5% reading in April.

The Bank of Canada’s (BoC) preferred measures of inflation also came in above expectations on a YoY basis. The CPI Median print rose +2.8% in May from +2.6% in April (consensus: +2.6%), while the CPI Trim measure rose +2.9% in May, matching April (consensus: +2.8%). Therefore, the average pace of inflation between these two measures is +2.85%, which is higher than economists forecast. Additionally, the CPI Common measure was lower in May at +2.4%, down from +2.6% in April.

Rate Cut in July?

You will recall that the BoC reduced the Overnight Rate by 25 basis points to 4.75% at the June meeting, which was largely priced in and expected. Therefore, there was little in the way of surprise. However, the central bank made it clear that should improvements in the disinflation process materialise, we can expect additional easing.

According to the Overnight Index Swaps markets, a moderate hawkish repricing was seen following the event. While a July cut is not off the table, the odds of a cut have fallen; there’s now a 40% probability priced in that the central bank will cut rates in July (compared to more than a 60% probability before the release of the data). As of writing, markets are largely leaning towards either September or October’s meeting. But it is important to recognise that one inflation report is not a trend, and before July’s policy meeting on 24 July, June’s inflation data will be released on 16 July.

Market Snapshot

The immediate aftermath witnessed the Canadian dollar (CAD) rally, with the USD/CAD currency pair reaching a low of CAD1.3624 before swiftly paring back a large portion of recent gains to a high of CAD1.3660 and testing the mettle of H1 resistance at CAD1.3665, sheltered just south of trendline resistance, extended from the high of CAD1.3779. To the downside, support calls for attention at CAD1.3615, closely shadowed by another layer of support from CAD1.3600 the figure.

Technically speaking, short-term price action suggests sellers remain in control south of said resistances, targeting the support area between CAD1.3600 and CAD 1.3615.

DISCLAIMER:

The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.