Annual CPI Falls Below 3%

Canadian inflation continued to soften in July, as the headline annual inflation rate fall below the 3% mark for the first time in five months coming in at 2.7% reading. That compares to 3.1% in June.

width=341Annual core CPI rose at a 1.6% rate year-over-year, stronger than the 1.3% in June.

On the month, both the headline rate and the core rates rose at 0.2%, a modest gain.

On the month headline inflation rose to 0.2% while core inflation was also up 0.2%. That shows rather tame inflation pick-up in July, though it compares to drops of 0.7% and 0.6% respectively for those indexes in June.

The moderating pace of inflation may suggest the recent spike in prices - with May CPI hitting an eight-year-plus high - was temporary, and as a result further eases pressure on the Bank of Canada to raise rates. We have been trying to anticipate the next interest rate increase from the Bank of Canada, where rates are currently at 1%, but with global uncertainties escalating in August the central bank may want to be cautious in when it raises rates next. One of the main reasons being the proximity to the US, and that the US is Canada's main trading partner. That means a weaker US recovery will have an outsized impact on the Canadian economy, compared to say Australia.

The CPI report will give the central bank time to assess the global economy before raising rates.

There wasn't much of an immediate impact to the Canadian crosses initially but after 20 minutes we saw the Canadian dollar get a bit of a bid as it was the weaker prior to the release. CAD crosses reclaiming some of that lost ground in the hours prior to the release. That is most notable against the pound, yen, dollar, and euro.

This coincided with a general move towards some risk-on trading as S&P500 futures rebounded form their lows, paring some of their worst losses. European equities were also trying to pare back some of their steepest losses, which helped higher yielders and commodity currencies in general. The CAD generally benefits from positive risk appetite.

A look at CAD crosses:

The USD/CAD was higher prior to the release and traded around 0.9910 afterwards, mainly digesting the strong gains we still had in yesterday session.

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In the wake of the report however, we have see the pair break down through support

The AUD/CAD had has had a very strong run in favor of the Canadian Dollar over the last two trading sessions but was weaker prior to the release giving up some of its stronger gains against Aussie. We had been as low as 1.0230 but have climbed back up to 1.02 90prior to that CPI release.

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The Swiss franc was was stronger overnight against the Canadian dollar with the CAD/CHF extending its overnight declines, though mainly consolidating the downswing we had yesterday, when the franc was stronger as well.

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The euro, EUR/CAD, also having been weaker against the Canadian dollar overnight - hitting a low near 1.4140, was up to 1.4190 after the release though most of those gains had come prior to the release. We are near the overnight highs, but have fallen back.

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The GBP/CAD is also an important level of resistance following the CPI report, at 1.6355. That is the high for this week and the pair retreated from near those values prior to the release. The GBP has been very strong.

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Finally the CAD/JPY is testing an important level of sport overnight with the Canadian dollar is weaker against the Japanese yen over the last two trading sessions we treated at the 77 level prior to the release with the Canadian dollar has continued to try and find support though in the one-hour timeframe is using the 21 moving average as resistance.

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Nick Nasad
Chief Market Analyst
FXTimes