The Canadian dollar barely flinched at this morning’s data releases. Neither the drop in headline inflation in May nor the OPEC June market report pushed the loonie away from trading flat on the day – just below the $1.355 level against the dollar.
The CPI data was never likely to be a major market-moving event given the fact that much of the BoC’s monetary stimulus has already been implemented. With no corresponding impact on interest rate expectations, the release passed by with limited market reaction. This is likely to remain the case with deflation expected in developed markets over the coming months, especially when measured on a YoY basis. CPI releases will become important again towards the back-end of Q3, however.
Should the MoM trend not show improvement once demand conditions return, conditional on the continued scaling back of lockdown measures, the implications of inflation data for monetary policy are likely to return.
Should this occur, the BoC’s current LSAP programme will likely be ramped up, with speculation rising over another rate cut in rates from the effective lower bound towards the zero lower bound.
The lack of adjustments in OPEC’s June report also resulted in limited USDCAD volatility. The cartel kept their global growth forecast for the year unchanged at -3.4% YoY, with oil demand forecasts also remaining the same at -9.1m bpd. Output is estimated to have fallen by 6.3m bpd in May as the early signs of its latest production cut filter through. Oil benchmarks continue to trade on the back-foot, however, as further travel bans and lockdown measures have been implemented in Beijing due to its latest spike in Covid-19 cases.
Further details on the CPI release:
- Headline CPI fell 0.4% on a YoY basis, down from -0.2% in April. Excluding gasoline, CPI rose by only 0.7% in May, its smallest increase since January 2013 when food prices were lower as a result of the 2010-12 food price crisis. The CPI excl gasoline figure was also near depths seen during the back-end of the financial crisis (chart 1).
- Transportation prices (-3.0%) fell the most to the decline in headline CPI, mainly due to lower gas prices compared with May 2019, while food prices (+3.1%) showed the largest positive increase. This is befitting with the impact of lockdown measures and the rise in food store sales.
- Gasoline prices are starting to recover, with prices rising 16.9% MoM in May after falling 15.2% in April and 17.8% in March.
- Rents declined for the second consecutive month in May, falling 0.8% MoM from April. The impact of Covid on rental prices was two-fold. Firstly, demand for rentals fell to lower-than-usual levels due to physical distancing measures and employment losses. In addition to this, many short-term rentals were converted into long-term rentals in response to lower demand, regional travel restrictions, and an uncertain housing market outlook.
CPI excl gasoline plumbs to levels not seen since the world food price crisis in 2012 and the financial crisis as plummeting consumer demand takes its toll
USDCAD sits roughly flat on the day despite CPI and OPEC releases
Author: Simon Harvey, FX Market Analyst