Analysis of Canadian Inflation Data and Its Impact on the CAD
WHAT YOU SHOULD KNOW
- Canadian inflation data is expected to reflect slowing inflation, with the annual rate dropping to 3.4% in May 2023.
- The Bank of Canada’s baseline scenario anticipates inflation easing to around 3% by summer, raising questions about the extent of future rate hikes in its tightening campaign.
- The release of Canadian Producer Price Index (PPI) data alongside the Consumer Price Index (CPI) is also significant, with industrial producer prices experiencing a 1% slide in May 2023, driven by falling energy prices and global economic conditions.
Analysts anticipate tomorrow’s release of Canadian inflation data to show a slowdown in inflation. The previous month’s report revealed that Canada’s annual inflation rate dropped to 3.4% in May 2023, marking the lowest rate since June 2021. This decline was attributed to base year effects from the impact of Russia’s invasion of Ukraine on international energy prices. The Bank of Canada’s baseline scenario aligns with this result, expecting inflation to ease to around 3% by summer. This raises questions about the extent of future rate hikes in the Bank’s tightening campaign, especially as the slowdown was driven by a significant decline in transportation prices, primarily due to plunging gasoline prices.
Alongside the Consumer Price Index (CPI) release, the Canadian Producer Price Index (PPI) data will also be released simultaneously. In the previous release, industrial producer prices in Canada experienced a 1% decline in May 2023, surpassing market expectations. This decline can be attributed to falling prices for energy and petroleum products, including notable drops in diesel fuel and finished motor gasoline, as well as decreased prices for primary non-ferrous and ferrous metal products. These price declines are influenced by slowing global economic conditions and oversupply issues, particularly in China. Poor GDP data out of China at the beginning of the week is not expected to bring significant changes in this regard.
From a technical perspective, the Canadian dollar (CAD) has been on a downward trend against the US dollar (USD) since March. It has reached specific downside Fibonacci targets based on a 61.8% retracement, and recently bounced off the 100% extension. If the inflation data continues to come in weaker than expected, further downward pressure is anticipated for the CAD, possibly pushing it towards the 1.275 level. The upcoming inflation data will play a crucial role in determining the future direction of the Canadian dollar. Better-than-expected data could suggest a potential end to rate hikes, while weaker results may exert additional downward pressure on the CAD against the USD.
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