Canadian data preview: Retail sales could be critical as the BOC is keen on hiking

Canada publishes its inflation report for August and the Retail Sales publication for July on Friday, September 21st, at 12:30 GMT. There are no significant US publications at the same time, allowing the USD/CAD to move solely on the Canadian figures. On the other hand, Canada's reports can go in opposite directions, offsetting each other.

Canadian CPI 

Inflation picked up in Canada back in July, with the headline Consumer Price Index rising from 2.5% to 3% year over year. Core CPI, which excludes volatile prices and is watched more closely by the Bank of Canada, rose from 1.3% to 1.6%. 

The report for August is forecast to show more modest inflation. Headline CPI is projected to tick down to 2.9%. More importantly, Core CPI carries expectations for backtracking down to 1.4% YoY.

If both Core CPI YoY and CPI YoY meet expectations, the monthly changes will come into focus. Headline prices are predicted to slide by 0.1% after jumping by 0.5% last month. Core CPI rose by 0.2% MoM in July, and a similar figure is likely now.

BOC set to hike in October

The Bank of Canada convened in September and left the interest rate unchanged at 1.50% as broadly expected. The interest rate event did not consist of a press conference by Governor Stephen Poloz.

However, Senior Deputy Governor Carolyn Wilkins said that the BOC deliberated whether to accelerate the pace of rate hikes. The Ottawa-based institution considered removing the word "gradual" from the description of future rate increases. Her hawkish comments not only sent the Canadian Dollar higher but also raised expectations for a rate hike. 

The inflation data is not expected to shine, but the bar is low for a rate hike as we learned from Wilkins. It would take a big disappointment such as a drop of Core CPI YoY closer to 1% to cause the BOC to doubt its moves.

Retail Sales can steal the show

As the rate hike has high chances barring a considerable slowdown in prices, retail sales could steal the show. Contrary to the US, consumption data is published late: six weeks after the month had ended. Nevertheless, like in the US, consumption is critical to the economy.

Sales badly disappointed win June with a drop of 0.2%. They are now expected to pick up and bounce back with an increase of 0.4%, more than compensating for the decline. The same goes for Core Retail Sales, which exclude cars. After slipping by 0.1% in June, an increase of 0.6% is projected now. 

A beat of expectations could boost the loonie, and that is possible given the volatility of this economic gauge. A minor increase or a second consecutive month of drops could deal a blow to CAD. 

USD/CAD positioning with the NAFTA elephant

Negotiations between Canada and the US have slowed down. The US and Mexico struck a deal, and Canada was expected to join it swiftly. However, Trump initially instructed his negotiators not to compromise on anything. After several missed deadlines the frenzy ended, and talks are now moving slowly. Assuming no breaking headlines around the publication of the data, we are unlikely to see any impact from NAFTA on the USD/CAD.

Other factors are mixed. Oil prices are on the rise thanks to a change in the supply/demand balance in the world. On the other hand, the new US tariffs on China are due on September 24th, and this weighs on the C$, a risk currency.

All in all, the USD/CAD is balanced into the data. 

Conclusion

Canada's Retail Sales will likely dominate despite being a lagging indicator and one that is not directly related to the BOC's rate decision. Inflation has become somewhat less important for as the BOC is keen on hiking rates in October. The absence of US releases at the same time leaves the stage for the Canadian data. NAFTA talks are currently on the backburner but should not be forgotten. 

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