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2-Year Highs in Canadian Inflation May Spark Change to BoC Policy

By Baruch Spier
20 June 2014 13:17 GMT

Talking Points:

  • Canadian inflation reaches a new 2-year high
  • BoC may change outlook as core inflation also nears target
  • USD/CAD falls to a 5-month low

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Canadian Data

Actual

Expected

Prior

Revised Prior

CPI MoM (May) n.s.a.

0.5%

0.3%

0.3%

CPI YoY (May)

2.3%

2.0%

2.0%

CPI Core YoY

1.7%

1.5%

1.4%

Retail Sales MoM (Apr)

1.1%

0.6%

-0.1%

0.1%

Retail Sales ex. Auto MoM (Apr)

0.7%

0.4%

0.2%

0.2%

The Canadian Dollar posted significant gains on Friday, as Statistics Canada reported that annual inflation rose well above the central bank’s target rate and to a new 2-year high. Much of the 2.3% rise in consumer prices since May of 2013 was due to an 8.4% increase in energy costs. However, the core inflation rate also reached a 22-month high at 1.7%, including a 2.3% annual rise in food costs.

As part of its June announcement to keep interest rates at 1%, the Bank of Canada said earlier this month that inflation had reached the 2% target faster than expected because of rising energy costs. The BoC also said that it still sees a mix of risks to inflation because of the downside risk to economic growth, and the central bank maintained a neutral outlook on the next interest rate change. However, the move higher in core inflation combined with soaring energy costs may cause the central bank to reconsider its outlook on inflation and consequently its neutral outlook on monetary policy.

The surprise rise in inflation combined with the better than expected retail sales for April caused the Loonie to rally 50 pips against the US Dollar. USD/CAD reached a 5-month low at 1.0752 and approaches support by the 12/2013 high at 1.0737.

USD/CAD 1-Minute: June 20, 2014

2-Year Highs in Canadian Inflation May Spark Change to BoC Policy

Currency Analyst David Song warned ahead of the inflation release that a sustained break lower may trigger further fresh lows in USD/CAD trading.

USD/CAD Daily by David Song

2-Year Highs in Canadian Inflation May Spark Change to BoC Policy

Charts created by Baruch Spier and David Song using Marketscope 2.0. Add DailyFX Support/Resistance to your charts at FXCM Apps.

-- Written by Baruch Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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20 June 2014 13:17 GMT