CAD: Setting up for retail sales (July) and CPI (August) - TDS

Research Team at TDS, suggests that the market reaction to the simultaneous release of retail sales and CPI of Canada will be most likely driven by the retail sales report for July, where we are well below the market consensus.

Key Quotes

“We expect CPI to be near-consensus which if realized should not have as large an impact on the markets. Despite the Bank of Canada’s recent downward tilt in the risk to the outlook for inflation, data on economic growth (and therefore the output gap) matters more than published CPI data. Note as well that an empty US economic data calendar will allow markets to take their cue entirely from the domestic data.

Retail Sales: Industry data reporting a drop in auto sales is expected to drive another month of weakness for headline retail sales which are forecast to have fallen by 0.4% m/m in July. Given an unchanged seasonally adjusted print for headline CPI for the month of July, the anticipated weakness in nominal retail sales will flow through to the volumes metric. Softer consumer spending to start Q3 will present a modest offset to what is otherwise shaping up to be a strong quarter as the economy rebounds from the wildfires in Northern Alberta that had imperiled activity in the second quarter.

CPI: August CPI inflation is expected to firm on higher energy prices and a modest pickup in the core components. We look for headline CPI to rise 0.2% m/m, leading the annual inflation rate higher to 1.4% y/y vs 1.3% y/y in July. The core index likely rose by 0.2% m/m after a more modest 0.1% gain in July, leaving the core inflation rate stable at 2.1% y/y. If realized, the August projection would be consistent with a core inflation rate of 2.1% in Q3, exceeding the Bank of Canada's July MPR projection of 2.0%. That said, the August readings offers limited implications to the Bank of Canada outlook in light of the Bank's concern over the downside risks stemming from serial disappointment in export growth.

Foreign Exchange

We look for external drivers to continue to shape the outlook for USDCAD over the next few sessions. Indeed, the hawkish hold from the Fed has failed to convince markets that a December hike should dent the risk rally. This suggests the relief rally in risk assets should continue to weigh on the greenback ahead of the weekend. That said, a softer read on the Canadian data releases could see CAD lag on the crosses with higher-yielding currencies (like AUD and NZD) leading gains in the majors.

For USDCAD, our high-frequency fair value models suggest the pair looks overvalued, targeting a move back to 1.30. Market positioning also suggests that the short squeeze may persist, indicating further pressure on USDCAD over the next few days. That said, US election risks will soon drift onto investors’ radar screens, limiting declines in the greenback, so look to scale back into long USDCAD positions on dips below 1.30.”