Forex Trading Library

Canadian Inflation: BOC to Follow the Fed?

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After its last meeting, the BOC was talking tough on rates, saying that inflation would remain high for the first half of this year. Tomorrow we’ll get the latest Canadian inflation figures to see if that stance is justified in the data. The consensus among economists is that this will be the case. Which means the BOC will be left on track to keep rates high for as long as if not longer than the Fed.

But that doesn’t mean the CAD will get a significant amount of traction. It has fluctuated a bit since the start of the year, but the USDCAD has ended up being relatively flat. This could be a reflection of traders expecting the broad moves in the currency to match the greenback. Given the trajectory of employment and expectations for inflation, that might very well be the case. So, if the upcoming data is out of line from forecasts, it could provide a jolt to the system.

Lower But Is It Enough?

The consensus among economists is that January Canadian inflation will come in at 3.2%, down from 3.4% in December. That would keep it in line with the BOC’s forecast of being above 3.0% until the middle of the year. To complicate things a little further, the bulk of the reduction is expected to come from lower fuel prices, which implies underlying inflation is still quite entrenched.

The core rate, excluding food and energy, is expected to tick down slightly to 2.5% from 2.6% prior. But the measure that the BOC prefers to focus on is the CPI Trimmed-Mean, which is also expected to come down by a small amount, just that it’s a lot hotter at 3.5% compared to 3.6% prior.

Gauging Potential Reactions

The relatively small change that is expected leaves the door open to potentially significant beats, if only from a technical measure. An increase of just 0.2% in the inflation rate would push the direction of the trend back to the upside. Meanwhile, a miss would likely confirm the current trajectory of coming down, and it would take a larger margin to potentially move the market.

The thing is, the market is already pricing in a rate cut by June. That coincides with what the market expects the Fed to do. Both the BOC and the Fed have pushed back on potential easing. But the BOC has been more firm in its insistence that inflation is too high. In other words, the market is already trying to get ahead of the data, which means it might need a bigger shock to change the trend. In the meantime, data-driven moves have largely faded, with the exchange rate reverting back to the median after a time.

Is There a New Trend?

The latest data suggest that the market might be getting ahead of itself. A couple of weeks ago, wages were reported higher, and the unemployment rate actually fell. The number of new jobs being created increased, a sign that upward pressure on inflation might continue.

So far this year, the market has had to adjust its future look on the rate path several times after data was hotter than expected. That also happened with American data, which has helped contribute to the USDCAD returning to the mean. That might mean that CAD traders looking for trends might need to look at other pairs, such as the EURCAD or GBPCAD.

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