Canada: Expect a slight moderation in CPI to 1.5% y/y for May - TDS

All eyes are on the Canada’s May CPI release, which on the back of a robust retail sales report is at risk of driving July rate hike odds higher and analysts at TDS expect a slight moderation to 1.5% y/y.

Key Quotes

“In particular, May inflation will be keenly watched for any signs of stabilization or firming in the Bank’s three core inflation measure, which would put further pressure on the Bank of Canada to act. For the headline figure, we expect a slight moderation to 1.5% y/y, with lower gasoline prices driving a further deceleration (y/y) in energy prices. We see potential for food prices to climb further out of deflation though lingering competitiveness pressures are likely to limit the rebound.”

“While we expect core metrics to stabilize and eventually move higher in the coming months, another slip in May cannot be excluded given the long lagged effects of material slack. The latter case, if realized, should be faded given the Bank of Canada's recent comments and shift in tone. That said, a further slowdown will give room for the Bank of Canada to keep policy on hold in July, especially along weak oil prices.”

“Foreign Exchange

The CPI report is mission critical for USDCAD. We see significant two-way risk for the currency. Following a robust retail sales print that pushed OIS pricing well above 50% for the July meeting and triggered a near 100-point collapse in USDCAD, markets are now knocking at the doorstep of key trend-support in the currency pair. An uptick in the average underlying CPI measures—particularly CPI common—would be enough, we think, to break through trend -support in the 1.3180/1.3200 area, a move we think, that would open downside potential as far as 1.30 in the coming days. However, a disappointment in CPI would introduce a significant snapback in USDCAD towards 1.3300/40, a region however that has and should continue to provide significant resistance for the currency pair.”