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CPI Inflation Inches Lower, Retail Sales Post Highest Gain in Seven Years.

CPI Inflation Inches Lower, Retail Sales Post Highest Gain in Seven Years.

Canadian economic data has been upbeat for a few months now, and Retail Sales data for January continued this trend, growing 2.2% from December. This was the highest month-on-month growth rate posted since March 2010 (according to data from Statistics Canada). Increase in retail sales was quite broad; with 10 of the 11 subsectors reporting growth. These 10 sectors represent 98% of retail sales.  Sales of motor vehicles and part dealers increased by 3.8%, and has now posted growth in four of the last five months. Within this segment new car sales were up strong, with increase of 4.2%, indicating confidence at the consumer level.  Excluding the auto sector which accounted for 26% of all retail sales, growth was more moderate, but still strong at 1.7%. There was also strength geographically, with all provinces reporting higher retail sales in January.

Consumer Price Index (CPI) increased by 2.0% in February, slightly lower than January’s 2.1%. The Bank of Canada has attributed the recent increase in inflation due to higher gasoline prices, which they consider to be transitory.  In February, excluding gasoline prices, CPI was up 1.3%, lower than January’s 1.5%. This indicates inflationary pressures in the economy are quite benign. In February, gasoline prices were up 23.1% compared to the same time last year, when prices were at their lowest.  This base effect will start eroding in the months to come, easing headline inflation lower. The three core inflation measures of the Bank of Canada did not show any build up of inflationary pressures. CPI-common & CPI-median were steady at 1.3% and 1.9% respectively, and CPI-trim edged 1 bps lower to 1.6%.

Implication for Bank of Canada’s Monetary Policy Committee Meeting on April 12th

Strong retail sales and job growth will put pressure on the Bank of Canada’s (BoC) dovish monetary stance and its ability to “talk” the loonie lower.  Inflation data could give an opportunity for the BoC to retain its view that there is slack in the economy.  The BoC has viewed CPI-common as the best gauge of inflation in the economy, edged lower by 1 bps since December. The BoC cut interest rates twice in 2015 to counter the slowdown after the crash in crude oil prices, holding rates steady since then with a dovish bias. In recent months after the US rate hike, the BoC reiterated it is not following the US by increasing interest rates in Canada due to continuing slack in the economy and slow job growth.

Market Reaction

The Canadian Dollar rallied higher after the release of retail sales data, but this was offset by lower inflation numbers. The good news from Canadian economic numbers are fully priced in the Canadian Dollar, and the trend will set up OPEC’s possible extension of the production cuts, and US interest rate expectations in the coming weeks. 


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  2019
Currency Spot Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34
EUR/USD 1.1204 1.15 1.17 1.19 1.22
USD/JPY 109.3050 107 106 106 15
GBP/USD 1.2710 1.32 1.36 1.40 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90
USD/CNY 6.9002 6.72 6.68 6.63 6.58
AUD/USD .6926 0.74 0.75 0.76 0.77
USD/INR 69.3725 71.00 70.75 70.50 70.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63
GBP/CAD 1.7077 1.72 1.78 1.85 1.93
CAD/JPY 81.3493 82 81 80 78

  2020
Currency Spot Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34
EUR/USD 1.1204 1.15 1.17 1.19 1.22
USD/JPY 109.3050 107 106 106 15
GBP/USD 1.2710 1.32 1.36 1.40 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90
USD/CNY 6.9002 6.72 6.68 6.63 6.58
AUD/USD .6926 0.74 0.75 0.76 0.77
USD/INR 69.3725 71.00 70.75 70.50 70.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63
GBP/CAD 1.7077 1.72 1.78 1.85 1.93
CAD/JPY 81.3493 82 81 80 78
  2019 2020
Currency Spot Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34 1.33 1.32 1.33 1.32
EUR/USD 1.1204 1.15 1.17 1.19 1.22 1.25 1.26 1.25 1.24
USD/JPY 109.3050 107 106 106 15 104 103 101 100
GBP/USD 1.2710 1.32 1.36 1.40 1.44 1.45 1.46 1.45 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90 20.10 20.40 20.60 20.70
USD/CNY 6.9002 6.72 6.68 6.63 6.58 6.53 6.50 6.47 6.44
AUD/USD .6926 0.74 0.75 0.76 0.77 0.78 0.79 0.79 0.80
USD/INR 69.3725 71.00 70.75 70.50 70.25 70.00 69.75 69.50 69.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63 1.66 1.66 1.66 1.64
GBP/CAD 1.7077 1.72 1.78 1.85 1.93 1.93 1.93 1.93 1.90
CAD/JPY 81.3493 82 81 80 78 78 78 76 75

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