How y’all doing, forex friends? Just so you know, Canada will be releasing its CPI report this Friday at 12:30 pm GMT. So if you’re looking to pillage some quick pips from the Loonie before the week comes to a close, then this top-tier catalyst is your best bet. And it just so happens that I’ve got an Event Preview for it.
What happened last time?
- Headline CPI m/m: +0.1% as expected, same as previous
- Headline CPI y/y: +2.5% vs. +2.3% expected, +2.2% previous
- Trimmed Mean CPI y/y: +2.0% vs. +1.9% previous
- Weighted Median CPI y/y: steady at +2.0%
- Common Component CPI y/y: steady at +1.9%
Canada’s June CPI report showed that Canada’s headline CPI only increased by 0.1% month-on-month. That’s not too bad, though, since the reading matched the rate of increase in May and is also in-line with expectations.
It gets better if we look at the annual readings since headline CPI increased by 2.5% year-on-year, which is much faster than the 2.2% increase recorded previously and also exceeded expectations for a 2.3% rise. By ythe way, did I mention that the +2.5% reading is the strongest annual increase since February 2012? Yep, it was that good.
As for the BOC’s three preferred measures for the “core” reading, the Weighted Median CPI and Common Component CPI were both steady at +2.0% and +1.9% respectively. However, the Trimmed Mean CPI improved from +1.9% to +2.0%.
Looking at the details of the report, 5 of the 8 CPI components printed stronger monthly increases, while one printed a steady reading, and the remaining two showed declines, so not too bad.
The details for the annual reading are even better since they show that 6 of the 8 CPI components printed stronger increases, one printed a weaker increase and the remainder showed a steady reading, so the stronger headline reading was indeed broad-based.
Overall, however, the June CPI report was pretty good. And that’s why the Loonie jumped higher as a knee-jerk reaction when the report was released. And it very likely helped that Canada’s June retail sales report, which was released simultaneously with the CPI report, also surprised to the upside.
What’s expected this time?
- Headline CPI m/m: +0.1% expected, same as previous
- Headline CPI y/y: +2.5% expected, same as previous
For the month of July, the general consensus among economists is that headline CPI increased by 0.1% month-on-month, which is the same rate of increase as in June.
There’s also a consensus that the headline CPI increased by 2.5% year-on-year, matching the previous month’s annual reading.
So, what do the available leading indicators have to say?
- The prices index of the Ivey PMI report eased from 74.3 to 71.1 in July, which means that input costs increased at a weaker pace in July.
- Markit’s manufacturing PMI report corroborates the Ivey PMI report since Markit found that “Input cost pressures eased only slightly from the seven-year peak seen in June.”
- Despite weaker input cost inflation in July, Markit also found that “Surcharges for raw materials were passed on to clients in July, with factory price inflation accelerating to a survey-record high.”
How about the historical tendencies? Do they offer additional insights?
Historically, there are more instances where the July reading has been stronger compared to the June reading. However, that no longer seems to be the case in the last five years.
As to how economists fared with their guesstimates, well, economists either get it right or are too optimistic, resulting in more downside surprises compared to upside surprises. They are right more often than not, though.
Moving on to the annual reading, there are also more instances where the July reading has been stronger compared to the June reading.
Unfortunately, we don’t really have much to work with when it comes to how economists fared with their guesstimates for the year-on-year reading.
To summarize, the leading indicators point to weaker input price inflation. However, Markit found that “Surcharges for raw materials were passed on to clients in July, with factory price inflation accelerating to a survey-record high.” And that’s a promising sign for CPI.
As for historical tendencies, they show that CPI tends to be stronger in July on both a monthly and annual basis. However, historical trends also show that economists either get it right or overshoot their guesstimates for the monthly reading, which does skew probability slightly more towards a potential downside surprise. As for the annual reading, we don’t really have a lot to work with.
Anyhow, just keep in mind that we’re playing with probabilities here, so there’s always a chance that the monthly CPI reading may print an upside surprise. Also, keep in mind that Markit found that factory price inflation accelerated “to a survey-record high.”
Also, do keep in mind that forex traders are usually 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 triggering a Loonie selloff.
However, the annual reading also plays a part. And make sure to check the BOC’s three measures for the core readings as well, since they are more directly linked to BOC rate hike expectations.
And as usual, keep in mind that the Loonie takes directional cues from oil prices as well. You may therefore also want to keep an eye on oil prices. And if you didn’t know, you can check out oil prices at our Live Market Rates page.