There are a couple of events on the economic calendar tomorrow to move the Canadian dollar.
While Canada has, so far, been sidelined by global uncertainty, it doesn’t mean that they will always be. We need to be wary of any signs of a change in economic patterns.
This is especially true for such a seasonal country that is entering winter when economic output generally slows.
Canada is an interesting case study. With the BOC largely staying out of this year’s race to the bottom in rates, the market tends to react to economic data directly.
Without the filter of what the central bank might do, we get a more organic reaction to the data.
Nothing Lasts Forever
There is mounting speculation that the BOC will have to take action if only to keep policy from being distorted by external factors.
With this in mind, the yield curve has continued deeper into inversion over the last month. The market appears to be pricing in at least two rate cuts over the next 12 months.
Prices remain nearly exactly where the central bank wants them. The inflation rate is sticking within a decimal of the target 2.0% annualized change in CPI since June. Governor Poloz’s rhetoric has shifted from price stability to expressing concern over the “worsening global situation” as the primary issue for the economy.
What We Are Expecting
For market reaction, we want to look to the core CPI’s monthly change.
Expectations are for this to come in at 0.3% for October, increasing the pace from 0.0% in the prior month. This would imply that the annualized change in consumer prices would stay at 1.9%. Inflation just one decimal below the target is no normal reason for the BOC to want to change policy.
There are two factors driving price changes. And, for now, they are canceling each other out.
Unusually low temperatures are pushing up the price for heating fuels, which is coupled with a slow increase in the price of crude. Balancing that out is a drop in the price of foodstuffs and clothing, a trend that we can expect to continue for the rest of the winter due to larger harvests.
Excluding food and energy, expectations are for monthly CPI to increase by 0.6%. This would add to the arguments against BOC rate cuts.
The Other Measures
Projections indicate that unadjusted CPI will remain flat this month, compared to -0.4% in the prior month. On an annualized basis, though, this would bring it also to 1.9%, just like last month.
What a lot of analysts will be interested in are the retail sales data to be published on Friday. This can give us some advanced notice of the CPI trends, as we get a look at consumer trends ahead of the all-important Christmas season.
Expectations are for core retail sales to pick up. This suggests that even though the external economic situation remains uncertain, Canadians remain confident in at least the near term.
Imports of consumer goods have increased, suggesting that at least Canadian retailers expect to have a better winter season than last year. In reality, an adjustment in the reference rate would presumably make credit cheaper and help with sales. It would do so even if a rate cut would imply a weaker loonie and a consequent increase in inflation.
In the end, Poloz’s primary reason given for global concern had to do with the trade environment. With both the US and China talking up the chances of reaching an agreement, trade might not be such a big concern in the future.
We might expect the BOC to change its outlook in that case, and return to its prior neutral stance.