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Howdy, forex friends! Canada’s retail sales report ain’t the only top-tier economic report on the docket this week since Canada will also be releasing its CPI report tomorrow at 1:30 pm GMT. And I just so happen to have an Event Preview for that top-tier report as well, so read up!

What happened last time?

  • Headline CPI m/m: -0.4% vs. -0.3% expected, +0.3% previous
  • Headline CPI y/y: +1.9% as expected vs. +2.1% previous
  • Trimmed Mean CPI y/y: +1.9% vs. +1.8% previous
  • Weighted Median CPI y/y: steady at +1.9%
  • Common Component CPI y/y: +1.6% vs. +1.5% previous

If you can still remember last month’s Event Preview, I noted back then that the leading indicators showed that input costs weakened, which may (or may not) reflect on CPI.

I also noted that the consensus for a weaker monthly CPI reading had a historical basis but economists have a strong tendency to overshoot their guesstimates.

I therefore concluded that probability was skewed more towards the downside, at least for the monthly headline reading.

And, well, the actual reading did surprise to the downside since Canada’s December CPI report revealed that headline CPI fell by 0.4% month-on-month, which is worse than the expected 0.3% dip and is the first negative reading in five months to boot.

Given the miss, the Loonie began to encounter selling pressure across the board.

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

However, bulls quickly began fighting back, likely because the CPI report was actually mixed since the annual reading for headline CPI came in at +1.9%, which is within expectations.

Also, two of the BOC’s three preferred measures for the “core” reading showed improvements, which removed some of the disappointment.

To be more specific, trimmed mean accelerated from +1.8% year-on-year to +1.9% and the common component CPI did the same, accelerating from +1.5% to +1.6%. As for the weighted median CPI, it maintained the annual pace of +1.9%.

Even so, bearish pressure was notable and the sellers eventually won out before the Loonie’s price action became a bit more mixed, likely because bulls received reinforcements because of the rising oil prices at the time.

What’s expected this time?

  • Headline CPI m/m: +0.4% expected vs. -0.4% previous
  • Headline CPI y/y: +1.5% expected vs. +1.9% previous

For this Friday’s CPI report, the general consensus among economists is that headline CPI rebounded by 0.4% month-on-month in January after dipping by 0.4% back in December. Annual CPI, meanwhile, is expected to decelerate further from +1.9% to +1.5%.

What do the available leading indicators have to say?

  • The Ivey PMI report’s prices index jumped from 62.5 to 66.6 in January, which means that Canadian companies saw even higher input costs.
  • Markit’s manufacturing PMI report supports this since “input cost and output charge inflation both picked up again in January.” Not only that, factory gate charges were the “strongest since April 2011.”

Both Ivey and Markit point to higher input costs while Markit is also saying that Canadian manufacturing companies were passing on their higher input costs, which likely means higher CPI.

The available leading indicators therefore support the consensus that monthly headline CPI strenghtened.

How about historical tendencies? Do they support expectations?

Well, there is a strong historical trend for monthly CPI to improve between December and January.

And while there are no strong historical trends when it comes to how economists fared with their guesstimates, it’s worth pointing out that economists have been too pessimistic with their forecasts in recent years, resulting in more upside surprises since 2012.

To summarize, the leading indicators point to stronger inflationary pressure in January, which supports the consensus that monthly CPI rebounded.

In addition, the consensus for a stronger January reading is backed up by historical data.

Furthermore, economists have been too pessimistic with their guesstimates lately, so probability appears to be leaning slightly more to the upside, at least with regard to the monthly reading.

However, that historical trend is fairly recent. Also, we’re playing with probabilities here, so there is always a chance that the actual monthly reading will surprise to the downside instead.

Anyhow, just keep in mind that forex traders usually pay more attention to the monthly CPI reading, with a better-than-expected reading usually triggering a quick Loonie rally while a miss generally causes a quick Loonie selloff.

The Loonie’s reaction to last month’s release is a rare exception since the Loonie’s knee-jerk reaction immediately after the release was only minimal. Although selling pressure was clearly present in the wake of the CPI report.

In any case, just make sure to keep an eye on the annual CPI reading and the BOC’s core CPI measures as well.

And again, the Loonie appears to be taking some directional cues from oil again after decoupling for a bit, so you may also want to keep an eye on oil prices as well. You can check out oil prices at our Live Market Rates page.