CAD: CPI miss consistent with patient BoC – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the CAD was the under-performer in G10 FX yesterday following the release of inflation data that highlighted the potential scope the BoC has for delaying any rate hikes in Canada.

Key Quotes

“Indeed, the softness of the inflation data yesterday could trigger renewed speculation that the BoC may ease its monetary stance further, although that’s not our view.”

“The markets now have a number of new inflation measures to analyse with three new core CPI rates – CPI Common, CPI Median and CPI Trim. The average of these three new CPI measures fell from 1.8% to 1.6% while the Common-CPI annual rate fell from 1.4% to 1.3% and is down from 1.7% at the start of the year. In fact the 1.3% reading was the lowest level since July 1996. With wage growth weak in Canada, in part due to the contraction in the energy sector, inflation is set to remain soft for some considerable time, allowing the BoC to be very patient with rate hikes.”

“The data sits with our analysis of which central banks have the greatest ability to maintain easy monetary policy in the face of possible reflationary policies coming under the Trump presidency. We deemed the BoC has having more time to wait than most other G10 central banks – only the RBNZ and the SNB could be more patient. USD/CAD with oil over USD 50 a barrel points to downward pressure but the 2-year US-CA swap spread suggests scope for USD/CAD to move toward the 1.4000 level. The yield spread tends to be more influential over time and we see that as a sign of further CAD weakness over the short-term.”