The Canadian CPI print will be released at 1330 UK time. If we see a surprise beat in the print then we would expect the CAD to rally higher on higher interest rate hike expectations. However, that will not change the outlook for the Canadian economy and could only end up putting more pressure on households. Higher interest rates will mean a greater risk of slowing Canada’s economic activity.
In contrast, a weaker than expected CPI print will take the pressure off the BoC needing to hike rates so aggressively and that should allow the CAD to weaken out of the print.
So, here are the expectations from the Financial Source calendar
Headline is expected to come in at 6.9% y/y. Minimum expectations are 6.4%y/y and maximum 7.4% y/y
The core reading is expected to be 0.8% m/m with 0.3% m/m minimum and 1.2% the maximum.
The trimmed mean, one of the BoC’s preferred measures of inflation, is expected to come in at 4.9%
CAD CPI likely reactions
If the headline reading comes in at 6.4%, core at 0.3%, and trimmed mean below 4.9% then the Canadian dollar should weaken out of the meeting. A CADJPY short may potentially be worth considering depending on the latest BoJ activity.
In contrast, if the headline comes in above 6.9% y/y, core above 0.8%, and the trimmed mean above 5.2% then the CAD should strengthen out of the print, but then growth worries could cause that surge higher to be faded. In this case, depending on the latest BoJ activity, a CADJPY short may still be worth considering. The desire for the BoJ to strengthen the JPY and pressure on the BoJ to shift from their ultra loose policy, does open up the possibility for JPY strength generally against the CAD.
At the same time the US Retail Sales data will be released. Here are my joint expectations
Weak #CAD CPI + Strong US Retail Sales = upside #USDCAD
Weak #CAD CPI + Weak US Retail Sales = downside #CADJPY
Strong #CAD CPI = Strong US Retail Sales = Fade #CADJPY strength