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Looking for top-tier reports to trade this week? Canada’s CPI release this Wednesday (Feb. 27) at 1:30 pm GMT could be your chance to grab quick pips off Loonie pairs.

Let’s go through our usual event preview routine, shall we?

What happened last time?

  • December 2018 headline CPI at -0.1% vs. expected -0.4% figure
  • December 2018 core CPI posted another 0.2% drop
  • Headline CPI y/y up from 1.7% to 2.0%
  • Common CPI y/y steady at 1.9% as expected
  • Median CPI y/y unchanged at 1.8% vs. consensus at 1.9%
  • Trimmed mean CPI y/y also unchanged at 1.9%

Canada’s December inflation situation was a mixed one as the headline figure beat expectations with a smaller than expected 0.1% dip instead of the projected 0.4% drop.

On a year-over-year basis, this translated to a 2.0% reading, up from the earlier 1.7% figure. Underlying data revealed that all eight major components posted gains in December, led by higher shelter costs.

Aside from that, a seasonal gain in transportation costs during the holiday season also accounted for a chunk of the consumer price gains. On the flip side, energy components were down 3.7% on a year-over-year basis, leading Canadians to see an 8.6% decline in gasoline prices then.

On a seasonally adjusted basis, the December CPI is up 0.2% after a 0.1% dip in the previous month as food, health and personal care indices ticked higher.

What’s expected this time?

  • January 2019 headline CPI to post 0.2% increase
  • Common CPI y/y to stay unchanged at 1.9%
  • Trimmed mean CPI y/y to hold steady at 1.9%
  • Median CPI y/y also to stay unchanged at 1.8%

Number crunchers are predicting a positive monthly CPI reading for the first month of this year, likely driven by the pickup in crude oil prices for January.

Looking at the leading indicators such as the Ivey PMI could have a few more clues. Its prices component, however, is down from 64.6 to 57.4 in January to reflect a slower pace of increases.

The IHS Markit manufacturing PMI is just as downbeat, with the headline figure easing from 53.6 to 53.0 in January 2019. The measure for input cost inflation moderated to its 17-month low, although there were indications that higher steel costs and exchange rate depreciation may have been passed on to increased factory charges.

Can we really see weak numbers this month? If we look at the last ten January releases, we can see that consumer prices (both the headline and core readings) tend to rise faster in January compared to December.

Canada's headline CPI (Jan)
Canada’s headline CPI (Jan)
Canada's core CPI (Jan)
Canada’s core CPI (Jan)

In addition to that, the last few releases also show that analysts tend to underestimate both the headline and core readings around this time of the year.

How might CAD pairs react?

This particular CPI release doesn’t come with its usual buddy, the Canadian retail sales report, this time. This suggests that the reaction might be muted, unless of course the actual figures post huge upside or downside surprises.

The release of the December CPI figures were also unaccompanied by other catalysts from Canada, so Loonie pairs had a somewhat bullish reaction to upbeat underlying data.

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

So far, leading indicators are pointing to a softer increase in consumer prices in January. Historical data, however, warns us that analysts tend to underestimate the month’s price increases.

As you can see from the overlay above, the reaction of USD/CAD (or CAD/USD) was short-lived likely since the U.S. economy had a few medium-tier data points to contend with then.

The rest of the pairs appeared to have more follow-through on price action, although this could also hinge on crude oil behavior at the time of the release.