Forex Trading Guide: Canadian CPI Release (August)

If you’re looking for another news event to trade before the end of the week, you might wanna tune in to Canada’s CPI release in tomorrow’s U.S. session. Here’s my quick Forex Trading Guide for this report.

What is this event all about?

If you were paying attention in your Economics 101 class instead of daydreaming about what you’d be having for lunch, then you’d remember that the consumer price index or CPI keeps track of inflation or the changes in price levels. And you’ve also been a good student in our School of Pipsology, you’d know that central bank officials keep close tabs on inflation to gauge if they need to make any adjustments in interest rates or money supply, which then influence the demand and value of a currency.

Inflation has been one of the biggest themes driving forex price action this year, particularly for Canada which has been heavily affected by the oil price slump early on. The folks over at the Bank of Canada (BOC) have already announced a couple of interest rate cuts a few months back in order to keep inflation supported, so the CPI readings should give us some clues on whether or not the Canadian central bank is bound to ease again.

How did the previous report turn out?

For the month of July, Canada’s headline CPI showed a meager 0.1% uptick as expected, slightly weaker compared to the previous month’s 0.2% gain. The core version of the report, which strips out the volatile items such as food and energy costs from the calculations, churned out a flat reading for the second month in a row.

A quick look at the components of the July report shows that gains were seen among most items, except for transportation costs. Even so, a smaller decline was recorded in July, hinting that the effects of the oil price slide may be starting to fade.

Source: Statistics Canada

What’s expected for the upcoming release?

Canada is expected to show a flat reading for its August headline CPI, down from the previous month’s 0.1% rise, possibly due to the decline in commodity prices stemming from the global stock market selloff back then. The core CPI could show a 0.2% increase, which might still be enough to keep annual core inflation above 2%.

How might USD/CAD react?

Stronger than expected data could allow the Canadian dollar to advance against its forex peers, as this would show that inflation has been resilient despite the commodities slump in August. This could set the tone for a positive trend in price levels since oil and energy costs have seen a decent rebound the following month.

On the other hand, a much weaker than expected report or negative CPI readings could spur losses for the Loonie, as this could spark expectations of another interest rate cut from the BOC. Recall that the central bank decided to sit on their hands during this month’s policy decision but highlighted risks from China and other emerging economies, with upcoming reports such as the CPI likely to indicate whether or not the Canadian economy is in trouble.