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18 Dec 2015
CPI Canada Preview: Setting up for CPI (November) - TDS
FXStreet (Delhi) – Research Team at TDS, suggests that there are a number of forces at play in the November CPI report.
Key Quotes
“Seasonal drags in clothing and footwear and recreation should lead to a 0.1% m/m decline in the core CPI metric, though recent currency weakness may dull the impact relative to recent years. On a year-ago basis, core CPI should nudge higher to 2.2%. The all-items index however is forecast to advance by 0.1% m/m on an increase in energy prices which will exacerbate the base year effect and push the year-ago rate of inflation much higher to 1.6% in November (from 1.0%).”
“Our forecast suggests a quarterly tracking rate of inflation that is broadly in line with the Bank of Canada’s forecast from the October MPR. But as we have noted for some time, inflation is a secondary consideration for the Bank when it comes to policy implications and instead greater focus is placed on real activity measures.
Foreign Exchange
With the Fed rate hike out of the way and markets seemingly entering holiday mode, we do not anticipate much of an implication on USDCAD. The currency pair has traded in line with our overarching view but we would note that USDCAD is technically overbought on the daily, weekly, quarterly studies (RSIs in particular). This leads us to believe that USDCAD could be more prone to the downside on a positive surprise in the data.
Fixed Income
With inflation a secondary concern for the Bank of Canada, the CPI data is unlikely to have a significant impact on rates. The easing bias in the short-end of the curve will remain intact, and we do not anticipate any change in the curve either. However, if our forecast for all-items CPI proves accurate, carry on RRBs will be slightly better relative to nominal bonds, and 30-year breakevens are currently within striking distance of post-crisis lows. We therefore look for the CPI data support RRBs on the margin— even with oil prices at extraordinarily low levels.”
Key Quotes
“Seasonal drags in clothing and footwear and recreation should lead to a 0.1% m/m decline in the core CPI metric, though recent currency weakness may dull the impact relative to recent years. On a year-ago basis, core CPI should nudge higher to 2.2%. The all-items index however is forecast to advance by 0.1% m/m on an increase in energy prices which will exacerbate the base year effect and push the year-ago rate of inflation much higher to 1.6% in November (from 1.0%).”
“Our forecast suggests a quarterly tracking rate of inflation that is broadly in line with the Bank of Canada’s forecast from the October MPR. But as we have noted for some time, inflation is a secondary consideration for the Bank when it comes to policy implications and instead greater focus is placed on real activity measures.
Foreign Exchange
With the Fed rate hike out of the way and markets seemingly entering holiday mode, we do not anticipate much of an implication on USDCAD. The currency pair has traded in line with our overarching view but we would note that USDCAD is technically overbought on the daily, weekly, quarterly studies (RSIs in particular). This leads us to believe that USDCAD could be more prone to the downside on a positive surprise in the data.
Fixed Income
With inflation a secondary concern for the Bank of Canada, the CPI data is unlikely to have a significant impact on rates. The easing bias in the short-end of the curve will remain intact, and we do not anticipate any change in the curve either. However, if our forecast for all-items CPI proves accurate, carry on RRBs will be slightly better relative to nominal bonds, and 30-year breakevens are currently within striking distance of post-crisis lows. We therefore look for the CPI data support RRBs on the margin— even with oil prices at extraordinarily low levels.”