Canadian CPI inflation follows upbeat employment report – Forex News Preview

Christina Parthenidou, XM Investment Research Desk

After a solid employment report, the next important release for the Canadian currency is the inflation figures on Wednesday at 1230 GMT. While forecasts are positive, the Bank of Canada (BoC), like most of its major counterparts, is not expected to change its neutral stance on interest rates, not before the domestic economic picture brightens and global headwinds calm.

In late-April, the BoC left interest rates unchanged and lowered its 2019 growth forecasts from 1.7% in January to 1.2%, with the governor, Stephen Poloz, saying that only under a negative disturbance would the Bank consider the case of lower rates.

So far in the year, though, economic developments were rather encouraging after a turbulent fourth quarter which saw the Canadian economy growing at the slowest pace in more than two years. The latest employment report showed that the labour market is a cause for optimism as job creation in April appeared surprisingly the highest in nine years, wages in permanent positions strengthened, and the unemployment rate reversed lower. In other data, the trade deficit narrowed due higher oil exports, while the pickup in housing starts improved somewhat the outlook for the slowing housing sector.

The April Consumer Price Index will be next to watch tomorrow, and analysts are hopeful that the annual headline inflation could extend the three-month recovery to the BoC midpoint target of 2.0% from 1.9% previously even if the monthly gauge is forecast to slow by 0.3 percentage points to 0.4%. An improvement in core CPI measures, however, which give a clearer picture on the inflation trend, could be more welcomed.

In terms of monetary policy, higher inflationary pressures accompanied with a tightening labour market could provide more comfort to the BoC to keep rates steady when it meets in late May, lowering markets expectations for a rate cut (31.6% probability by the end of the year according to overnight indexed swaps) . But caution is likely to remain until GDP growth starts to trend up again and global threats such as the heating US-Sino trade war reach a solution. Last week’s failed round of trade talks between the US and Chinese delegates and the recent exchange of tariff warnings between the sides is suggesting that the window for a breakthrough is rather narrower than previously thought. Note that despite Canada being excluded from Trump’s imports tariffs, the economy is heavily depended on commodity exports and hence additional barriers in the international trade market could significantly weigh on the Canadian welfare.

The loonie could gain in the wake of stronger-than-expected inflation figures on Friday but probably only temporarily as the economic future domestically and globally continues to hold in the dark, backing an accommodative monetary policy for now. In this case, USDCAD could retest the 1.34-1.3380 area as it did when the employment report beat expectations last week.

Otherwise if inflation disappoints, USDCAD could jump above the 1.35 mark with scope to break resistance between 1.3520 and 1.3440.