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Today Canadian CPI numbers are scheduled to be announced. Clearly, the Canadian economy was only able to recover from the collapse of the oil price in 2014/15 as well as it did because the export industries outside the energy sector benefitted from the robust growth in the US. It is also concerned about the recently disappointing development of inflation. For the Bank of Canada, the risk of protectionist measures on the part of the US remains one of its main concerns.
Even though both the rate of inflation and the different measures of core inflation, which the BoC takes into consideration, remain within the BoC’s target range of 1-3%, there is no doubt that price pressure has eased over the past few months.
Today’s price data is likely to point towards a stabilization at best. All that points towards a continued accommodating monetary policy on the part of the BoC, which means that CAD’s appreciation potential is limited for now as well.
Consumer prices in Canada rose 1.6 pct year-on-year in March of 2017, easing from a 2 pct increase in February and below market expectations of 1.8 pct. Gasoline prices slowed and food and clothing cost declined.
CAD retains reasonable correlation with oil, but an intra-range move from the mid-to-low 50s is less significant than sub-30 or above 60. These two areas are rough thresholds where the impact to the Canadian economy becomes more significant: Sustained WTI prices above 60 would translate to a real re-rotation back into investment into new oil production capacity, while sustained prices below 30 threaten the viability of existing capacity.
Forecast still call for near-term weakness in CAD, but gradual recovery in 2H as we approach the first BoC hike. We forecast for a 1.41 near-term peak in USDCAD by mid-year, which we’ve held since the start of the year, was largely predicated on a US Fed delivering a quarterly pace of hikes against a still-dovish BoC and rangebound oil prices. To the extent that the recent risks which have emerged, while not actually being realized, reinforce BoC dovishness for a while longer while the Fed carries on with its mid-year hike, a short-term move higher in USDCAD in the coming months still seems likely.
