Canadian Dollar Brushes Off Plunge in CPI, Gains Could Accelerate on Canadian Retail Sales

The Canadian dollar generally brushed off the weaker-than-expected results of Canadian CPI on Friday, as the currency ended the day up nearly 4 percent versus the greenback.

Focusing on the data, Canadian CPI fell by the most since 1959 during the month of October, bringing the annual rate down to a 5-month low of 2.6 percent. The decline was led by gasoline prices, but even the Bank of Canada’s core measure of CPI slipped, though the annual rate held steady at 1.7 percent. Nevertheless, the data suggests that inflation in the country is likely to fall below their 2 percent target sooner rather than later, and thus, Credit Suisse overnight index swaps are now close to fully pricing in a full 50bp cut at the BOC’s next meeting in December. Looking ahead to next week, Tuesday’s release of Canadian retail sales is forecasted to have gained 0.3 percent in September, and excluding autos, retail sales are forecasted to have risen 0.2 percent. However, there is potential for a surprisingly strong reading given the solid employment numbers we’ve seen lately. In fact, the Canadian economy has added on workers for the past three months, and a record 106.9K in September alone. Furthermore, the September reading of Canadian wholesale sales surprisingly jumped 1.5 percent, and can sometimes serve as a good leading indicator for the headline retail sales report. As a result, this 8:30 ET release has the potential to lead the Canadian dollar higher, though a disappointing figure could weigh the Loonie down.

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