Canada: Headline inflation rate to slow to 1.3% y/y – TDS

In view of analysts at TDS, Canada’s headline CPI was likely flat on the month, reflecting a drag from gasoline prices, which would cause the headline inflation rate to slow to 1.3% y/y vs 1.6% y/y due in part to unfavourable base effects.

Key Quotes

“Headwinds from the past strengthening in the Canadian dollar—non-petroleum import prices fell by 20% annualized in Q3—are built into this forecast as well. Sector-specific effects also pose downside risks, such as a continued decline from telephone services prices due to heightened competition in the sector from the unveiling of cheaper data plans. Meanwhile, we expect shelter prices to gain steam after a relatively weak month, in line with the resurgence in housing activity in Toronto and Vancouver. Food prices also have scope for sustained strength though remain vulnerable to past exchange rate appreciation.”

“Special attention will be given to exclusion-based core measures (ex food and energy and CPIX) which are currently underperforming the BoC's preferred core measures—an indication that transitory one-off factors are driving the recent disappointment in inflationary pressures. These factors will be important to keep in mind in the months to come as further weakness could stay the Bank's hand. But alongside sustained improvement in the trend-based measures, which suggests that slack continues to dissipate, we expect the BoC to look through below-target inflation, setting the stage for a January rate hike. It should also be noted that even with the past sources of downward pressures, 2% inflation remains in sight with our current forecast now showing inflation back to target as early as March.”

“Foreign Exchange

We see neither a valuation gap and lopsided positioning in the CAD at the moment, leaving the CPI data as an important barometer for direction USDCAD. Insofar as the Bank remains “data dependent”, data surprises will remain in the drivers seat. Given that the Bank has emphasized caution and hence, an asymmetric policy response in this period of “uncertainty”, it’s possible that CAD may show greater deference to a modest disappointment. Barring a major disappointment on inflation, 1.2820/40 will be a key pivot area on the topside. We spot supports near 1.2700/10, which coincides with daily uptrend support established from the September lows. We think this should be rather thick, but a break below would set the stage for accelerated declines and a likely retest towards 1.26 in the coming days and weeks.”