The Canadian dollar soared on Friday. Statistics Canada reported inflation data far better than what economists had forecast. July Consumer Price Index rose 3.0%, y/y (forecast 2.5%) and Core CPI rose 1.6% y/y (forecast 1.3%,) USD/CAD plunged on the news, dropping from $1.3160 to $1.3150. However, enthusiasm was curbed after economists and analysts noted that the gains were due to large temporary increases in a number of components. They also pointed out that the more important core-CPI reading was still below the middle of the Bank of Canada’s (BoC) 1-3% range.
Nevertheless, the BoC governor maintains that future rate increases are data dependent. Friday’s inflation report supports the view of another rate hike in September or October. The data might support a rate increase, but the North American Free Trade Agreement renegotiation doesn’t. Canada has been excluded from the last four U.S./Mexico trade talks, and there are reports that those two countries could announce a deal as early as this week. If so, it suggests that Canada could be handed a "take-it-or-leave-it" ultimatum. The Canadian dollar would sink deeply if that were the case.
The Canadian dollar, like the rest of the G-10 major currencies, is vulnerable to European developments, particularly the U.S./Turkey spat. USD/TRY rallied again during the overnight session. A Turkish high court denied the U.S. pastor’s appeal to be released. The U.S. administration denied Turkey’s attempt to tie the release of the pastor toward reducing financial penalties levied by the American government against Turkish banks. Turkey is under the threat of fresh U.S. sanctions as well. The risk of another sharp Turkish lira selloff has underpinned the greenback, and Canadian dollar gains have also been limited.
This is not a banner week for economic data from the U.S. or Canada. There isn’t any data of note today. Canada retail sales data is due on Wednesday. Economists are looking for some "payback" after May’s robust gain of 2.0%. The forecast is 1.1%, and a weaker than expected result would undermine the Canadian dollar.
FX traders will also be reluctant to get too involved in trading in the early part of this week due to Wednesday’s release of the Federal Open Market Committee meeting and then the Friday/Saturday Jackson Hole Symposium. The minutes should not cause a stir as they are not expected to provide any fresh insight.
The drop-in oil prices also undermines the Canadian dollar. WTI oil is in a downtrend below $68.70 U.S./barrel looking for another test of support at $63.75/b.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
