Canadian double-feature Friday preview: Determining the direction of USD/CAD

• Canadian traders have a double-feature Friday with Inflation and Retail Sales data.
• The absence of substantial US figures means the Canadian Dollar's next moves depend on this publication.
• Inflation will likely have the upper hand in case the figures go in different directions.

Canada publishes its inflation data for March and Retail Sales for March on Friday, May 18th, at 12:30 GMT. In some such publications in the past, parallel US data added to the mix and the abundance of economic figures triggered a choppy reaction in the USD/CAD. This time, the Canadian Dollar is due to move only on Canadian data.

In other cases, the figures offset each other, also resulting in a choppy reaction. To have the most substantial impact, both publications need to go in the same direction: either exceed expectations or fall short. Nevertheless, inflation is likely to have the upper hand.

First, the Consumer Price Index numbers are more recent, for April, in comparison to the somewhat stale consumption data. Secondly, the Bank of Canada has recently forecast a pick up in inflation in later in the year. These are the first inflation indicators for the second quarter which carries higher expectations than the weak first quarter of the year. 

A third reason stems from the reaction seen in the previous publication. When Core CPI decelerated from 1.5% to 1.4%, the loonie suffered.

What is expected? 

The single most important number is the Core CPI YoY. It is expected to hold onto the previous pace at 1.4%. A slowdown to 1.3% or below will likely weigh on the loonie regardless of the other numbers while an acceleration to 1.5% or above would probably give the C$ a boost.

Month over month, core prices carry expectations for a rise of 0.2%, also mimicking the previous publication. Headline inflation is projected to rise by 2.6% YoY, an acceleration from 2.3% seen in March. Month over month, a repeat of the 0.3% increase is on the cards. 

The other inflation data are likely to come out in the same direction of the standout Core CPI YoY.

If the Core CPI YoY meets expectations, the next figure to watch is headline Retail Sales. Expectations are quite low: a drop of 0.1% MoM in March after a gain of 0.4% in February. Low expectations make a positive surprise easier, but the month of March saw substantial snow, so a decrease in sales makes perfect sense. Retail Sales excluding autos remained unchanged in February. 

USD/CAD positioning

Apart from Canadian economic data, the C$ is sensitive to NAFTA negotiations. Mexico, the US, and Canada hoped to conclude talks on May 17th, but this is likely just another self-imposed deadline that comes and goes. A big announcement around the release of the data could steal the show. 

Another factor is the price of oil. The black gold that Canada exports is getting comfortable above $70 per barrel on WTI. 

This leaves us with the most prominent factor: US bond yields. The 10-year Treasury yield, which is a global benchmark, has risen beyond 3% to the highest levels since 2011 and sent the US Dollar higher. Yields of other bond maturities have reached levels last seen in 2008 or 2009. 

The ebb and flow of bond yields around the event could have the most significant impact in addition to the outcome of the data. 

In the past few weeks, the USD/CAD traded between a low of 1.2730 to the round number of 1.3000. Within this range, 1.2800, 1.2865, and 1.2930 are notable levels that served as considerable levels of support and resistance during the first half of May. 

As the chart shows, the RSI is balanced and Momentum is hard to see. The pair is looking for a new direction. Range trading never lasts forever and the publication of two top-tier indicators can trigger a new trend. 

More: USD/CAD Forecast: After Trump’s Iran Move, Inflation is eyed