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Canada CPI Forecast: Inflation expected to continue declining in May

  • The Canadian Consumer Price Index is expected to rise 2.6% year-over-year in May, following a 2.7% increase in April.
  • Canada’s CPI inflation data is likely to influence the timing of the Bank of Canada’s next rate cut.
  • Statistics Canada will release CPI inflation data at 12:30 GMT on Tuesday.

Statistics Canada is set to release top-level Consumer Price Index (CPI) data for May on Tuesday at 12:30 GMT.

The timing of the next Bank of Canada (BoC) interest rate cut will depend on CPI inflation data, significantly impacting the market valuation and value of the Canadian Dollar.

What to expect from Canada’s inflation rate?

The Canadian CPI is expected to rise at an annual rate of 2.6% in May, slowing from April’s 2.7% increase. On a monthly basis, CPI inflation is expected to soften to 0.3% in the same period after 0.5% growth in April. The core CPI did not show growth during the month of April.

Along with the release of CPI data, the Bank of Canada will release its much-watched core consumer price index, which excludes volatile items such as food and energy prices. In May, the BoC’s annual core CPI inflation is expected to remain stable at 1.6%, while the BoC’s monthly core CPI will increase by 0.2%.

Canada’s inflation is likely to remain below 3.0% for the fifth consecutive month, although approaching the central bank’s 2.0% target.

Previewing the Canadian inflation report, analysts at TD Securities (TDS) noted: “We expect the headline CPI to rise 0.3% in May due to another large rise in the haven, as inflation slows to 2. 6% year-on-year.”

“Core inflation measures should remain stable at 2.9% and /2.6% for the trimmed/median CPI, translating into a modest acceleration on a 3-month basis (SAAR), but we do not expect The BoC is overly concerned about this and we see a high threshold for this reading to ruin a cut in July,” TDS analysts said.

Markets are broadly pricing in another BoC rate cut at the July 24 policy meeting. However, an additional inflation report is expected before the next monetary policy announcement.

TDS Chief Economic Officer James Orlando said “it would probably take a bad reading, either this month or next, to stop the Bank of Canada from cutting rates.”

The central bank’s Summary of Deliberations revealed last week that Governor Tiff Macklem and her colleagues considered waiting until July to lower interest rates, but ultimately decided to cut earlier at the June 5 meeting.

Following the monetary policy announcement, Macklem said that “if inflation continues to decline and our confidence that inflation is heading sustainably towards the 2.0% target continues to rise, it is reasonable to expect further cuts to our interest rate of policy.”

The BoC joined Sweden’s Riksbank and the Swiss National Bank (SNB) in cutting rates, followed by the European Central Bank (ECB), making Canada the first nation among G7 countries to adopt the dovish policy shift. monetary. The central bank cut the key policy rate to 4.75% from 5.0% in June, the first cut in four years.

How could Canada CPI data affect USD/CAD?

The Canadian Dollar (CAD) has paused its recovery from two-month lows of 1.3792 against the US Dollar (USD) ahead of Tuesday’s CPI showdown. Strong preliminary S&P Global PMI data for June from the United States and risk aversion continue to support the US Dollar at the start of the new week, providing support to the USD/CAD pair.

The Canadian Dollar could regain its recovery momentum if the headline and core CPI numbers surprise to the upside and crush expectations of consecutive rate cuts by the BoC. In such a case, USD/CAD could resume its downward correction towards the 1.3600 level. Conversely, soft CPI data could boost the BoC’s confidence that inflation is sustainably reaching its target, reverberating market expectations for another rate cut next month. In this scenario, USD/CAD could stage a bounce towards 1.3800 as renewed dovish bets could weigh heavily on CAD.

Dhwani Mehta, Senior Analyst at FXStreet, offers key technical levels for trading USD/CAD in the Canada Inflation Report: “USD/CAD struggles with the key confluence zone near 1.3690, where the simple moving average (SMA) coincides ) 21-day horizontal and the 50-day SMA. The 14-day Relative Strength Index (RSI) is just below the 50 level, reflecting buyers’ caution.”

“Acceptance above the confluence of the 21-day SMA and 50-day SMA at 1.3690 could take USD/CAD back towards the previous week’s high of 1.3765. Above, the round level of 1.3800 will be in on buyers’ radar, near two-month highs of 1.3792. On the downside, a daily close below static support near 1.3665 will reopen the door for a test of the 100-day SMA at 1.3619. The next relevant cushion. is seen at the 200-day SMA at 1.3586,” adds Dhwani Mehta.

economic indicator

Consumer Price Index (YoY)

Statistics Canada is the entity in charge of publishing the consumer price index, which is a measure of price movement through the comparison between the prices of retail sales of a basket of representative goods and services. The purchasing power of the Canadian dollar is reduced by inflation. He Bank of Canada targets an inflation range (1% – 3%). A high reading would anticipate an increase in interest rates and is bullish for the Canadian dollar.

Read more.

Next post: Tue Jun 25, 2024 12:30

Frequency: Monthly

Dear: 2.6%

Previous: 2.7%

Fountain: Statistics Canada

Why is it important for operators?

Inflation FAQs

Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.

The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.

Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.

Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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