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- September inflation and August retail sales surprise on the downside.
- October rate hike still a go says CIBC, but December is off the table.
- CIBC forecasts USD/CAD to decline in months ahead, GBP/CAD to rise.
The Canadian Dollar crumbled in the final session of the week after official data revealed a surprise fall in September inflation and retail sales for the month of August, placing Bank of Canada (BoC) monetary policy under a spotlight.
Inflation fell by -0.4% during September, extending the -0.1% decline seen back in August, when consensus had been for it to rise by 0.1%. This dragged the consumer price index down to 2.2%, from 2.8% back in August.
Canada's three adjusted measures of inflation all also declined during the month, although they still averaged out at exactly 2% for September. This leaves them in line with the Bank of Canada's 2% inflation target.
The adjusted measures are thought to be more representative of domestically generated inflation pressure because they exclude various things including energy and other volatile price items from the goods basket.
Markets care about the inflation data because it has significant influence over Bank of Canada interest rate decisions, which are the raison d'être for most moves in exchange rates.
"Soft is the word of the day for Canadian economy watchers," says Avery Shenfeld, chief economist at Toronto-headquartered CIBC Capital Markets. "Overall, soft news, not soft enough to forestall an October rate hike, but enough to lower expectations that had been building (erroneously in our view) for a follow up hike in December."
Retail sales declined 0.1% back in August following a 0.2% increase in July, but markets had expected sales growth of 0.3% for that month.
Core retail sales fell by a larger -0.4% when consensus had been for growth of 0.3%. Core sales exclude purchases of large ticket items like cars from the data because of the distorting impact they have on underlying trends.
Markets care about retail sales as they are a leading indicator of economic growth and because rising or falling consumption can influence inflation.
"This is consistent with Q3 GDP growth likely rising 2.3%. With this rate slightly above potential, and being achieved despite a temporary shutdown of a key oil sands production facility, it is expected to keep the Bank of Canada tightening," says Paul Ferley, assistant chief economist at Toronto-headquartered RBC Capital Markets.
The USD/CAD rate was quoted 0.15% higher at 1.3097 following the release after rising close to 100 points, while the Pound-to-Canadian-Dollar rate was 0.30% higher at 1.7074.
Shenfeld and the CIBC team say Friday's data will not be enough to prevent the Bank of Canada from raising its interest rate by 25 basis points to 1.75% on Wednesday 24, October. But that it may have prompted some traders to reexamine their views on what the BoC might do after October.
This is important for the Canadian Dollar because changes in rates, while only normally made in response to movements in inflation, impact currencies because of the push and pull influence they have on international capital and their allure for speculators.
"Our forecast assumes a 25 basis point hike next Wednesday will be followed by two further similar-sized hikes over the first half of next year," says RBC's Ferley.
The market implied interest rate for the BoC's October 24 meeting is around 1.72%, up from just 1.64% at the beginning of September, while the rate implied for January 09 has moved from 1.84% to 1.94% during the same time.
The current cash rate is just 1.5%, so the above pricing suggests investors will have taken much of the BoC's next two rate hikes to the bank, leaving only limited room for traders to reward an actual rate rise on the day.
Shenfeld's colleagues on the currency team at CIBC Capital Markets are forecasting that the USD/CAD rate will fall to 1.28 by January before rising back to 1.29 in time for March.
They project the Pound-to-Canadian-Dollar rate will hold steady around its current 1.70 level until year-end before rising to 1.74 in time for March 2019.
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