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Event Guide: Canada’s CPI Report (September 2023)


Attention, fellow Loonie traders!

Canada is gearing up to unveil a new set of CPI data tomorrow, and these numbers are poised to have a notable influence on broad Bank of Canada policy sentiment.

What are the expectations and what could be the next move for the Canadian dollar?

Event in Focus:

Canada’s Consumer Price Index (CPI) and inflation data for September 2023

When Will it Be Released:

October 17, 2023 (Tuesday), 12:30 pm GMT

Use our Forex Market Hours tool to convert GMT to your local time zone.

Expectations:

Headline CPI m/m: 0.5% m/m forecast; 0.4% m/m previous

Headline CPI y/y: 4.5% y/y forecast; 4.0% y/y previous

Median CPI y/y: 4.1% y/y forecast; 4.1% y/y previous

Trimmed CPI y/y: 3.9% y/y forecast; 3.9% y/y previous

Core CPI y/y: 3.3% y/y forecast;  3.3% y/y previous

Expectations as of Oct. 16, 5:20 pm GMT

Relevant Data Since Last Event/Data Release:

Average average hourly wages rose 4.2% y/y in September, 4.3% y/y in August

Capacity utilization rate slowed from 81.8% y/y to 81.4% in Q2 vs. estimated gain to 82.5%, reaching its lowest level since Q3 2020

Ivey PMI Prices Index in September was 67.3 vs. 66.7

S&P Global manufacturing PMI for September: “Suppliers continued to raise prices, although softening market conditions restricted their pricing power. The net impact was the weakest increase in input costs in the current four-month run of inflation. Manufacturers signaled ongoing success in pushing through higher input costs to clients, with output charges rising further in September. The rate of inflation was solid and above that signaled for input prices.”

Previous Releases and Risk Environment Influence on CAD

September 19, 2023

Overlay of CAD vs. Major Currencies Chart by TV

Overlay of CAD vs. Major Currencies Chart by TradingView

Event results / Price Action:

In September, the Canada CPI read for August came in at 4.0% y/y (3.9% y/y forecast; 3.3% y/y previous), with the Core CPI read at 3.3% y/y (3.5% y/y forecast; 3.2% y/y previous).  The monthly read was better-than-expected at 0.4% m/m vs. 0.2% forecast/ 0.6% previous, and the core CPI read fell from 0.5% m/m to 0.1% m/m.

It appeared that the markets generally took this as a slow down in inflation conditions as CAD proceeded to move lower through the rest of the U.S. session against the majors, but it should be noted that oil prices also fell on the session, likely drawing in CAD sellers as well given their strong correlations.

Risk environment and intermarket behaviors:


The broad risk environment was generally mixed this particular trading week as traders were on the sidelines early, awaiting a very heavy central bank event calendar (most notably the Fed’s latest monetary policy decision). Most assets were also moving on their own particular drivers, including business sentiment survey and inflation updates.

Overall, it was a generally risk-off vibe, but high inflation / interest rate themes also held strong, characterized by another strong in bond yields in the latter half of the week.

August 15, 2023

Event results / Price Action: Canada’s July headline CPI came in stronger than expected at 0.6% m/m versus the projected 0.4% uptick and earlier 0.1% gain. The core version of the report came in line with estimates of a 0.5% increase.

However, the upbeat headline figures did not do the Loonie much favors, as broader market themes weighed on the commodity currency for the most part of the week.

Risk environment and intermarket behaviors: Risk-off flows remained in play throughout the trading week, as concerns about China’s growth and financial stability lifted demand for safe-havens.

As it turned out, Country Garden – China’s top private property developer – missed some bond payments AND suspended the trading of 11 of its onshore bonds.

In addition, the prospect of more interest rate hikes from the Fed also kept risk-taking in check, as traders remained wary of a potential recession.

Price action probabilities:

Risk sentiment probabilities: 

Market fears induced by geopolitics have faded a bit to start the new week as diplomatic efforts to prevent the new war between Israel-Hamas from becoming a larger regional conflict could be seen. Hopefully further de-escalation and peace is the outcome from those efforts, but until then, this situation remains fluid and will likely have influence on broad market sentiment in the short-term.

As mentioned in our NZ CPI Event Guide, we’ve got a full economic calendar ahead to potentially influence market sentiment, with data updates likely to support the current driving themes of “peak inflation / rate hike cycles” and “slowing economic growth likely ahead.”

That could mean risk-on vibes if “peak inflation / rate hike cycles” is the driver more traders lean on, or potentially risk aversion vibes if “slowing economic growth likely ahead.” For now, it seems pretty balanced, but this week’s inflation updates could tip the scales one way or another.

Canadian dollar scenarios:

Potential Base Scenario:

This is definitely a volatility event for Canadian dollar traders to watch on Tuesday, but based on the past two releases, the market’s reaction to the Canadian CPI numbers may be short-lived as traders quickly returned focus to oil price action and broad risk sentiment to guide their CAD biases in September and August.

That makes this event a likely candidate for a reactionary “wait-and-see” approach to trading the event, especially given that trends have developed through at least the next day in the last two releases.

This means that the initial reaction is likely to have a positive correlation to the Canadian CPI update (i.e., higher than forecast / previous is likely to draw in buyers and vice versa), and if so, risk managers should then look to factor in the broad risk environment / oil sentiment for CAD’s next moves against the major currencies.

In the case of a potential strong CA CPI read (likely driving up odds of the Bank of Canada to be more hawkish) and a currently neutral-negative broad risk sentiment lean, pops higher in the Loonie against safe havens trending higher may be the pairs to watch and consider constructing risk management plans for if it makes sense to you.

Alternative Scenario:

If the geopolitical situation changes to a much more positive one (e.g., Israel-Hamas cease-fire, Irsael assault on Gaza delayed or canceled, no signs of additional countries joining the conflict, etc.), that could outweigh all other market drivers short-term, prompting a sell-off in oil and drive up risk-on sentiment.

Oil was probably the biggest driver during these moments on the Loonie last week, which means an oil dip could drive the Loonie lower short-term, overshadowing Canadian updates like inflation and retail sales coming up or broad risk sentiment.

Overall, a fluid geopolitical situation plus a busy economic calendar means stay nimble with ideas and biases, and be very vigilant on risk management execution!



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