CAD surges as inflation gets back above target

  • Canadian inflation comes back above the BoC target making another rate hike yet more probable. 
  • Retail sales disappoint suggesting economic growth may have already passed its business cycle peak.
  • EURCAD takes a step back following the data bouncing off its crucial long-term resistance.

The Canadian dollar had been the best performing currency in the G10 basket yet prior to the release, and after the data it undoubtedly strengthened its position. Even as retail sales softened in January, implying possibly a lesser contribution to growth from consumption in the first quarter, the CAD was offered stellar inflation which surged to the highest level in three years settling in above the Bank of Canada aim. The Loonie surged as inflation came back above the BoC target strengthening odds for another rate hike.

Headline inflation for February came in at 2.2% easily beating expectations pointing to 1.9% in a year-over-year basis. At the same time, the median of the three core gauges climbed 2% for the first time since June 2016 suggesting that domestic price pressures continue building up.

There is no doubt that having inflation above the target the Bank of Canada may feel to be pushed to the wall and therefore investors’ expectations pointing to two rate hikes this year seem to sound reasonably (the Fed tightening may help justify rate rises as well). Furthermore, higher price growth signals that the Canadian economy may begin running above its potential indicating the need for higher borrowing costs. What did drive prices higher last month? According to the statistics bureau among factors standing behind quicker pace growth are gasoline, cars, and mortgage interest costs. However, one cannot forget about the minimum wage increases in Ontario which seemed to play an important role as well.

While inflation surprised to the upside, the underlying trend in retail sales kept weakening in January.
January retail sales grew merely 0.3% in a monthly basis missing the consensus suggesting 1.1%. On the other hand, the core sales turned out to be much more resilient coming in at 0.9% beating the median estimate at 0.8%.

Otherwise, it’s worth adding that the numbers for December were slightly revised upwardly. By and large, the details do not look as bad as they seem because the fall in retail sales were driven solely by fewer car purchases while sales increased in seven out of 11 sub-sectors. However, there is no doubt that the economy is running close or above its potential which was already reflected in healthier wage growth. After the data the market likelihood for a rate hike in July surged to 82% (this is the first meeting, excluding April, when the BoC releases its fresh monetary policy report).

The EURCAD reversed immediately after the Canadian data bouncing off its long-term resistance nearby 1.61. Consequently, the pair seems to hold notable scope to continue falling even toward 1.5250. Finally, let us also recall that the CAD has already benefited from the promising fallout of NAFTA talks. In a nutshell, the CAD seems to offer a decent buying opportunity from the current levels taking into account its current valuation and the macroeconomic backdrop.