Canada: Setting up for CPI (September) and retail sales (August) - TDS

Analysts at TD are looking for a 0.3% m/m increase in the Canada’s September CPI, lifting headline inflation to 1.7% vs 1.4% in August.

Key Quotes

“Energy prices should be a net boost on higher gasoline prices, while food prices are at risk of downward pressures in light of the rapid appreciation seen in CAD. Other sources of downside include apparel – sensitive to currency fluctuations – along with telephone services, the latter of which has plunged in the prior two months. On the upside, we expect to see continued strength in shelter prices from lagged effects of increases in the new housing price index. The fundamental story remains sound with labour market slack dissipating and wage pressures picking up, allowing core inflation measures to stabilize or firm further in this report. The Bank's three measures averaged a 1.53% y/y pace in August; a move higher toward 2% would strengthen confidence that the output gap is approaching its closure, which we estimate will still occur by yearend.”

“Retail Sales: Retail sales are forecast to rise by 0.5% m/m in August, led by another increase in motor vehicle spending. This would leave ex-auto sales up 0.4% on the month, with gasoline station receipts expected to make a positive contribution due to Hurricane Harvey's impact on prices. August saw the unemployment rate reach a post-crisis low while consumer confidence rose to record highs, both of which should support increased consumer spending. Core retail sales will also benefit from higher wage growth, which has accelerated from early-2017 lows, though unseasonably cool weather may have a negative impact. Due to rising consumer prices, we look for real retail sales to underperform the nominal print with a more modest increase, consistent with a moderation in household spending growth from Q2.”

“Foreign Exchange:

• USDCAD comes into the August inflation print bouncing around on a few different themes. Most notable has been some of the recent repricing around the BoC following the perceived shift in tone from Poloz. While surprise indices remain positive, Canadian economic surprises have decelerated from the 3m trend and look weak compared to the rest of the G10. Still, we suspect that FX markets will remain highly sensitive to inflation reports, leaving CAD-watchers focused on the CPI print.
• The market’s forecasting bias is leaning towards a soft number, evidenced by the split between the average and median estimates. What’s more, the average of the core numbers has been steadily inching higher over the past few months. With that in mind, we believe that a on-consensus print is likely good enough to maintain the recent consolidation in USDCAD and favors our bias to remain short ahead of the BoC next week. This favors selling topside ahead of 1.25 while we continue to watch the key support levels near the 25dma (1.2436) and the next fibo level from the September lows at 1.2393. A downside break of the former should increase downside momentum towards 1.24.”