As the US markets open on Friday, Statistics Canada will release the hotly anticipated Canadian core consumer price index (CPI) (YoY) and CPI (MoM) figures. Consensus expects a dip in the raw figure, from the previous 1.5% to a forecast of 1.0%. If validated, it will represent the first period of slowing consumer prices since October 2013. Similarly, consensus forecasts the core reading at 1.1%, which if validated, will match the lowest reading since January 2013.
The data is particularly significant in light of Bank of Canada Governor Poloz’s recent statement that the next rate change would depend solely on new data. With inflation being one of the most revealing data points on the calendar, any sign of a slowdown would bolster the argument for a near term rate cut.
Take a look at the USDCAD chart:
There looks to be no stopping the USD at the moment. Production, construction, current account and employment data all beat expectations this week, which was then compounded not only by Yellen’s suggestion of a rate cut but also by the come and go risk-off sentiment imposed by the situation in Crimea (how long this latter draws US strength before the buyers switch to Yen or gold is unclear, but at present it remains a bullish dollar force).
The market has likely already priced a certain amount of the rate-cut potential into the USDCAD, but a validation of a slowdown could well be the catalyst behind new highs in the pair. Yellen’s comments broke the pair through in-term resistance on Wednesday to new three and a half year highs, meaning the level to watch will be Thursday’s highs at 1.1277.
A market that continuously makes new highs generally renders any form of traditional technical analysis useless. Every indicator will read overbought and throw up a bearish bias. Do not be fooled! Stick with the trend and take the key levels as they come. As mentioned, the first of these is at 1.1277. A daily close above this level would hint at further upside as we head into the weekend and back out the other side. Such a scenario would bring levels into play that date back as far as 2010, with an initial upside target at 1.1482.
Written by Samuel Rae – Chief Currency Strategist at Capital Trust Markets
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