Canada: July headline inflation to inch higher to 1.1% y/y – TDS

Analysts at TDS are looking for Canada’s July headline inflation to inch higher to 1.1% y/y from 1.0% y/y in June, reflecting a 0.1% decline in prices on the month.

Key Quotes

“We expect energy prices on balance to decline on the month, led by lower gasoline prices, but should be neutral on a year-ago basis. Further gains in food prices are likely, in line with the past increases in agricultural prices, though currency appreciation poses a downside risk in the months ahead. Other sources of strength in July include shelter costs on the back of the acceleration in new housing prices and rising mortgage rates.”

“Though we believe underlying measures of inflation are bottoming, we proceed with caution in the near-term and continue to see risks skewed to the downside due to lagged effects of economic slack, renewed currency appreciation and other sources of transitory weakness. The three metrics of core inflation (CPI common, trimmed mean and median) averaged 1.40% y/y in June and will likely once again drive the market reaction, with some stabilization or pickup to the benefit of rate hike expectations.”

“Foreign Exchange

The short-run outlook for USDCAD is likely to hinge on the July inflation report. The FX market has been rewarding currencies with positive inflation surprises and vice versa, consistent with the transition to convergence from divergence. Against this backdrop, a soft inflation read could start to shift the CAD narrative from the post-BoC rate hike euphoria to much of the good news being priced in. Our high-frequency fair value model shows that USDCAD is a bit cheap and points to a move back to 1.27. Our read on market positioning is that some stale long exposure is hanging on to CAD. This setup leaves USDCAD sensitive to the impact of the inflation print, where a soft number reinforces the squeeze back to the recent highs near 1.28 but an upside surprise could shift the momentum back in favor of a move towards 1.25.”

“US: Preliminary University of Michigan Sentiment will give the first look at consumer confidence for the month of August. Market expectations are for the index to post a mild rebound to 94.0 from 93.4. We will also watch inflation expectations for more signs they are recovering off previous lows.”