Markets

The Canadian Dollar Weakens As CPI Comes In Softer Than Expected

The Canadian Dollar Weakens As CPI Comes In Softer Than Expected

The USD/CAD headed higher following a softer than expected Consumer Price Index report that showed that Canadian inflation was not as strong as feared.  Data in Canada has been mixed over the past few months which has eased expectations that the Bank of Canada will move in lockstep with the tightening bias of the Federal Reserve.  The markets have overlooked the 0.6% gain in March Canadian retail sales, which was double the median forecast.  Currency trading in the USD/CAD remains rangebound, following the conflicting economic data points.

Canadian Yields Drop

Canadian yields tumbled lower after total CPI. Meanwhile, the 0.6% pop in retail sales which had a 0.8% gain in sales volume has been overlooked as the report does not conflict with the Bank of Canada’s (BoC) outlook for a slowing Q1 GDP. The April CPI report underpins expectations for no change in rates from the BoC this month, along with a gradually higher path this year. Total and core inflation is holding near the BoC’s 2% target, an outcome with which they have said they are comfortable with.

Canadian CPI Slowed More than Expected

Canada’s CPI slowed to a 2.2% year-over-year pace in April from the 2.3% year-over-year pace in March. CPI rose 0.3% month-over-month in April after the 0.3% gain in March. The slowing in the annual growth rate is contrary to expectations with the median forecast of +2.3% year over year with a 0.4% month-over-month gain. The core measures held near the BoC’s 2.0% target. CPI-trim grew 2.1% year-over-year in April following the 2.0% year over year increase in March. CPI-median held at 2.1% year-over-year from 2.1% year-over-year. CPI-common held at 1.9% year-over-year versus 1.9% year-over-year in April.

Canadian Retail Sales Were Stronger than Expected

Canada retail sales rose 0.6% in March after a revised 0.5% increase in February sales values which was +0.4%. The ex-autos sales aggregate fell 0.2% in March following a flat reading in February. A 3.0% gain in motor vehicle and parts dealers followed a 2.0% gain in February, driving total sales during March. Yet a 1.2% drop in food and beverage store sales, along with a 1.9% pull-back in gasoline station values despite, or perhaps because of higher gasoline prices, pulled the ex-auto sales aggregate underwater in March. The increase in total sales overshot expectations, but the ex-autos sales aggregate was contrary to expectations for a gain. Total sales volumes grew 0.8% month-over-month in March, supportive of further improvement in March GDP after the 0.4% rebound in February and 0.1% drop in January.

The Canadian dollar exchange rate remains rangebound and forming a wedge pattern, which is capped by a downward sloping trend line near 1.2975 and floored near an upward sloping trend line at 1.27.  Short-term momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal.