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How y’all doing, forex friends? Just so you know, Canada will be releasing its CPI report this Friday (August 18, 12:30 pm GMT). So if you’re looking to pillage some quick pips from the Loonie before the trading week ends, then this top-tier catalyst is your best bet.

And it just so happens that I’ve got an Event Preview for it, just in case you wanna get up to speed on what happened last time and what’s expected this time.

What happened last time?

  • Headline CPI m/m: -0.1% as expected vs. +0.1% previous
  • Headline CPI y/y: +1.0% vs. +1.1% expected, +1.3% previous
  • Trimmed Mean CPI y/y: +1.2%, same as previous
  • Weighted Median CPI y/y: +1.6% vs. +1.5% previous
  • Common Component CPI y/y: +1.4% vs. +1.3% previous

Canada’s headline CPI eased by 0.1% in June after a 0.1% rise in May, which is the first negative reading in five months. However, this was within expectations. According to the details of the CPI report, the fall was due largely to the 2.0% drop in energy prices, although the 2.2% slump in the cost of clothing and footwear was also a major drag.

Year-on-year, Canda’s CPI weakened from 1.3% to 1.0%, which is the weakest annual reading since October 2015.

Moreover, the annual reading missed the market’s expectation for a 1.1% increase. Furthermore, the 1.0% reading missed the BOC’s own forecast of +1.4%, as noted in the BOC’s July Monetary Policy Report.

So far, the CPI report looks pretty bad, right? It does get better, though, since two of the BOC’s three preferred measure for underlying or core inflation were able to show improvements.

As for specifics, the weighted median CPI finally picked up from +1.5% to +1.6% year-on-year. This puts an end to four consecutive months of ever weaker readings.

Meanwhile, the common component measure for CPI ticked higher to 1.4% after holding steady at 1.3% for five straight months, which is great.

As for the trimmed mean CPI, it maintained the 1.2% pace, which put an end to four consecutive months of deteriorating readings.

These improvements on the core readings reinforced the idea that the BOC may have made the right move when it hiked for the first time in seven years back in July.

After all, the BOC justified the rate hike amidst weak inflation by saying that the “factors behind soft inflation appear to be mostly temporary.” And while the reading for the annual headline reading was a miss, the main drag was the 1.3% decline in energy prices.

And the drag from energy prices was expected by the BOC since it noted in the July Monetary Policy report that the recent weakness in consumer energy prices “includes, in part, the recent decline in crude oil prices as well as the waning effect of the strong price increases in 2016,” as well as reduced cost of electricity in Ontario.

As such, the miss was a disappointment but it was’t really that disappointing.

Overall, the CPI report for the June period was mixed. However, forex traders were more focused on the uptick in two of the BOC’s three preferred measures for core inflation, which is very likely why the Loonie just shrugged off the plunge in oil prices at the time and jumped broadly higher, as expectations for further BOC rate hikes got reinforced.


Overlay of CAD Pairs: 15-Minute Forex Chart
Overlay of CAD Pairs: 15-Minute Forex Chart

What’s expected this time?

  • Headline CPI m/m: +0.0% expected vs. -0.1% previous
  • Headline CPI y/y: +1.2% expected vs. +1.0% previous

For the month of July, the general consensus among economists is that headline CPI was flat month-on-month but picked up the pace year-on-year (+1.2% expected vs. +1.0% previous).

In short, economists are expecting an improvement, at least for the headline readings.

Okay, but what do the available leading indicators have to say?

Well, first up is the the prices index of the comprehensive Ivey PMI report. And fortunately it soared from 57.4 to a three month high of 69.2. This means that survey respondents reported higher input prices in July. However, this does not automatically mean a higher CPI reading since the prices index does not show whether or not companies are passing on their higher input costs to consumers.

Markit’s manufacturing PMI report disagrees with Ivey’s findings since Markit reported that “Input price inflation eases to lowest since October 2016.” More importantly, Markit noted that “Softer input price rises contributed to a moderation in output charge inflation.”

However, it should be noted that Markit’s PMI report is focused solely on the manufacturing sector, so it’s still possible for the service sector to print stronger inflation to offset the rise in prices related to the manufacturing sector. Unfortunately, we just don’t have leading indicators for the service sector.

Moving on to historical tendencies, economists either get it right or are too optimistic with their guesstimates, resulting in more downside surprises compared to upside surprises.

And unfortunately, Statistics Canada does not apply seasonal adjustments to its CPI readings, so there’s no meaningful pattern with regard to how July’s CPI reading fares compared to June. Although it’s worth pointing out that the July reading has been weaker in the past three years. However, the pattern isn’t very meaningful because of the lack of seasonal adjustments.

In summary, the two available leading indicators are mixed and historical tendencies don’t really have much to offer, other than that economists either get it right or overshoot their guesstimates.

And usually, forex traders are focused on the monthly headline reading, with a better-than-expected reading usually giving the Loonie a bullish boost while a worse-than-expected reading usually triggers a Loonie selloff.

However, forex traders now seem to be more focused on the BOC’s three measures for the core readings, so it would probably be prudent to focus on those as well, since they’re more closely linked to BOC rate hike expectations.

Also note that Canadian economic reports are usually only good for pillaging quick pips from the Loonie since oil prices usually define follow-through buying and selling, although the market’s reaction to last month’s CPI report was one of those rare exception. By the way, you can check real-time prices of oil futures here and here.