Canada: CPI today a big test for BoC tightening expectations, time to sell CAD? - ING

In view of Viraj Patel, Analyst at ING, Canada’s July CPI data today will be a big test of the market’s expectation for another 2017 BoC rate hike; a negative core inflation surprise (especially to the common CPI measure) would raise doubts over the need to tighten again this year.

Key Quotes

“While the fallout may be slightly muted today as the central bank are pointing to “other factors” to loosely explain why inflation is temporarily low, we think the narrowing of 2-year US-Canadian rates has been extreme. Our view for a 2H17 recovery in the US economy – coupled with softer data in Canada and NAFTA renegotiation uncertainty – should see a partial reversal in rate differentials. This all points to upside risks in $/CAD towards 1.30, though US political uncertainty may hinder any near-term move higher. We prefer to sell CAD on the crosses and like short CAD/SEK given that the positive Swedish macro story is yet to be fully priced in.”