Canada: Headline CPI inflation to ease back to 1.9% y/y in December - TDS

Analysts at TDS expect Canada’s headline CPI inflation to ease back to 1.9% y/y in December on a reversal in gasoline prices.

Key Quotes

“Food prices have scope for a sustained rebound helped by stabilization in the Canadian dollar. In addition, vehicles prices could also hold firm on the back of better price gains in the US. One source of downside risk this month is cellphone services, as the Big 3 telecoms offered temporary cheaper data plans in December in response to Freedom Mobile's offering. But overall, risks to our forecast are skewed to the upside. We continue to expect CPI to firm back above the target rate on a sustained basis starting in March.”

“Exclusion based core index (CPIXFE or CPIX) should pick up on balance but the BoC core metrics (CPI common, trimmed mean and median) have more limited scope for a further acceleration given the sharp improvement in prior months. We thus expect stabilization in the latter which would be slightly downbeat to the market.”

“Foreign Exchange

• The market comes into the December inflation release navigating through a few themes. The biggest for CAD is the direct impact of the selloff in the greenback and the spillover effects to the smaller G10 currencies. Still, since the start of the year CAD has lagged all the major currencies on the selloff. It’s rallied about 2% against the USD but in nominal effective terms its down 0.4% from oya. This backdrop will make it hard to disentangle CAD moves from broader G10 ones and Trump’s speech at Davos will further cloud the signal.
• For the data, we note the Bloomberg consensus is skewed towards an upside print and Canadian data momentum is running top among the G10. The latter is sitting around levels that start to correct. As a result, this setup creates an asymmetric bias for USDCAD, which would push it higher on a miss given lofty expectations. That said, even on a good number, we look to fade a knee-jerk move lower in USDCAD, as Trump presents two-ways risks to risk appetite.”