Canadian retail sales and figures on consumer prices will go public this week but based on forecasts, inflation pressures are not seen warming up yet as both retail sales and inflation are expected to slow down instead. Taking this into account and considering the Bank of Canada’s data dependent policy approach, additional rate hikes are likely to come later than sooner.
On Thursday at 1330 GMT, Statistics Canada will report on retail sales for the month of December. On a monthly basis, retail sales are said to grow at November’s pace of 0.2%, signaling that Canadian households are still holding their belts tight when it comes to purchases including motor vehicles and healthcare treatment items. At the same time, this spurs speculation that consumer spending entered the new year on the wrong foot as inflation pressures might not get the boost desired to trigger further monetary policy tightening. Excluding automobiles, core retail sales are projected to lose steam, growing by 0.3% after previously reaching the highest growth in nine months of 1.6%.
On the inflation front, forecasts suggest a slowdown in consumer prices (CPI) on an annual basis in January, nevertheless, the measures are seen comfortably within the Bank of Canada’s inflation target range of 1-3.0%. The headline CPI, which fell from 2.1% to 1.9% y/y in December primarily due to cooler gasoline prices, is now anticipated to come in softer at 1.4% y/y. In monthly terms though, headline CPI is expected to turn positive, jumping by 0.4% following a decline by the same proportion in the preceding month. Should this materialize, then the measure would touch the highest expansion rate since May. It is also worth noting that two of the three BoC core measures (common and trimmed CPI) came in higher than their previously recorded readings in December on an annual basis.
But even if the above data surprise to the upside, boosting expectations that a rate hike is around the corner – given that employment indicators maintain a strong pace – the BoC might not be in a rush to raise interest rates yet. BoC policymakers might instead remain cautious until they identify substantial progress in NAFTA talks which have so far led nowhere in the sixth round of negotiations, weighing on the country’s investment outlook and trade activities. Another important factor that raises red flags is the overloaded household debt. According to Statistics Canada, household debt as a share of income touched a record high in the third quarter of 2017, while other statistics indicated recently that Canada is the sixth most indebted country in the world. Therefore, any rate rise would likely bring further troubles to households and more importantly leave the economy vulnerable to unexpected shocks. Risks might also arise from the Trump administration’s recent tax reforms which might incentivize Canadian businesses to move parts of their operations to the US in order to take advantage of the low-tax environment. Last week, the Business Council of Canada, in a letter to the Canadian Finance Minister Bill Morneau, called the government to follow the Trump administration’s strategy by cutting taxes on businesses; Morneau argued that Canada maintains its tax competitiveness.
Turning to forex markets, encouraging prints on retail sales and inflation might bring some noise to dollar/loonie which has been in an uptrend since the beginning of February, pushing the pair down to the 1.26 key level. Steeper declines could also break the 50-day simple moving average at 1.2531, shifting the focus to the 1.25 handle.
On the flip side, discouraging numbers could lift the pair towards the 1.27 psychological level, opening the way towards the 1.28 key mark and the previous top of 1.2918.
Finally, fluctuations in oil prices also have the potential to affect the pair.