Canadian double-feature Friday preview: Contradicting expectations lay the ground for a choppy reaction

  • Canada publishes retail sales and inflation that are set to rock the loonie.
  • Contradicting expectations set the stage for a volatile reaction.
  • The Canadian Dollar found some stability, for now, allowing the data to move it freely.

Canadian Inflation figures for June and Retail Sales for May are published simultaneously on Friday, July 20th, at 12:30 GMT. There are no parallel US publications, leaving the stage for these figures to move the USD/CAD.

Expectations from June's inflation figures are relatively upbeat: an acceleration in the Consumer Price Index from 2.2% YoY to 2.5% accompanied by a monthly increase of 0.3%, also quicker than 0.1% reported in May. Core CPI, which is no less critical, carries expectations for acceleration from 1.3% to 1.4% YoY, and also here, a monthly advance of 0.3%, after a slide of 0.1% in the previous month. 

Energy prices are on the rise and so is headline inflation all over the world. The expected acceleration makes perfect sense and should not impact the loonie. However, the projections for an increase in Core CPI do not seem to have a substantial basis. In the recent past, core inflation fell short of expectations, including those of the Bank of Canada.

Core inflation is, therefore, a weak spot. High expectations may result in a disappointment and may weigh on the C$.

On the other hand, projections for retail sales are quite modest. After a plunge of 1.2% in April, headline sales are predicted to remain unchanged in May. However, after such a significant drop, an increase has higher chances than just stagnation. 

Excluding autos, sales are projected to bounce by 0.5% after a slide of 0.1% beforehand. These expectations seem more logical and have better chances of being realized. Nevertheless, headline sales have a bigger impact on the loonie. 

USD/CAD

All in all, core inflation has a probability of disappointing while headline sales may surprise to the upside. If these two things happen, the reaction may be choppy, yet limited. The figures can offset each other. For a more meaningful outcome for the USD/CAD.

How is the pair positioned? The Canadian Dollar is under pressure for quite some time but has found some calm in the summer sun. There has been no significant news related to trade, the most sensitive topic for Canada, which heavily relies on the US. No news is good news for the loonie, allowing it to recover. 

The Bank of Canada recently raised rates and also maintained the bullish bias. On the other hand, oil prices are slipping. 

All in all, the picture is balanced, allowing the USD/CAD to adequately react to the data. 

More: How to trade the Canadian Retail Sales with USD/CAD

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