Canada will see the release of monthly inflation and retail sales figures on Friday at 12:30 GMT. The data comes just under three weeks before the Bank of Canada holds its next policy meeting on July 11 when policymakers will ponder whether to raise interest rates for a second time this year. While strong numbers on Friday would boost rate hike expectations for next month, the Canadian dollar may struggle to find much support from the data amid a worsening trade row with the United States.
Annual inflation in Canada hit a 3½-year high of 2.3% in March before easing slightly to 2.2% in April. It is expected to head back up again in May, rising to 2.5%, which would make it a 6-year high. On a month-on-month basis, CPI is forecast to rise by 0.3%. If confirmed, it would take inflation closer to the BoC’s upper target band of 3%, increasing pressure on the central bank to tighten monetary policy at its July meeting. But the BoC will also be watching its core CPI indicator, which stood significantly below the headline rate in April, at 1.5%.
Also due on Friday are retail sales numbers for April. Retail sales grew by a solid 0.6% m/m in March – double the expected rate. However, this was mainly on the back of strong vehicle sales, and excluding autos, sales were down over the month. The opposite trend is forecast for April with retail sales expected to post no growth during the month, but the core measure is anticipated to rebound by 0.5% m/m.
If Friday’s data points to a strengthening in price pressures and consumption, the Bank of Canada would be more inclined to raise its key policy rate by 0.25% in July. Market betters are currently pricing about a 70% probability that the BoC will act next month. However, stronger-than-expected numbers ahead of the BoC meeting may not be enough to convince policymakers to raise rates given the somewhat disappointing first quarter growth and May employment figures, and not to mention the growing trade tensions with the US – Canada’s biggest trading partner by far.
The Canadian dollar has taken a hammering over the past week as an intensifying trade dispute between the US and China has dampened the chances of a quick resolution of the NAFTA renegotiation. The growing trade risks drove the loonie to a one-year low of C$1.3329 to the US dollar on Thursday and the currency is at risk of further losses from the escalation in trade tensions.
A negative set of data on Friday could deepen the loonie’s woes and clear the way to the C$1.3340 level (a low from June 2017). Above this area, support could come from the psychological C$1.34 handle. A break above this mark would bring into scope the C$1.3510 level.
However, with the loonie looking oversold, a broadly positive release could trigger a sharp technical correction against the greenback. Immediate resistance is likely to come at the C$1.3265 level in the event of a reversal. Further gains could see the next hurdle coming at C$1.3160 followed by the C$1.3090 region.
