CAD Sinks As Core Inflation Slows

The Canadian dollar plunged on Friday, following the release of Canada’s inflation data for September. Even though the headline CPI rate rose as expected, the core rate ticked down, indicating that the improvement in the headline print was probably owed to movements in the prices of volatile items, such as fuel. This likely pushed back market expectations regarding the timing of the next BoC rate hike. Indeed, markets are now pricing in a 40% chance for another rate hike by year-end, down from roughly 50% on Friday.

Therefore, we believe that the signals we will get at Wednesday’s BoC policy gathering could prove critical for the Loonie’s near-term direction. If the Bank dismisses this soft patch in inflation as being transitory and keeps the prospect of another rate hike in December on the table, CAD could recover. On the other hand, if policymakers appear more cautious, indicating that continued softness in inflation could lead them to pause their normalisation cycle, the currency could continue correcting lower.

USD/CAD surged on Friday following the decline in Canada’s core CPI rate for September. The rate emerged above the longer-term downtrend line taken from the peak of the 5th of May, and subsequently, it broke above the 1.2600 (S1) hurdle, which acted as the upper bound of the sideways range that had been containing the price action since the 27th of September. In our view, Friday’s surge has turned the short-term outlook somewhat positive and thus, we would expect the bulls to take charge again and challenge the 1.2660 (R1) zone soon. A clear break above that obstacle may set the stage for more bullish extensions, perhaps towards our next resistance of 1.2770 (R2). Having said that, given that the latest surge appears overextended, we would stay careful that a corrective setback may be looming before buyers decide to take the reins again.

Abe wins the Japanese election

In Japan, Shinzo Abe won a landslide victory in the nation’s election, retaining his position of Prime Minister. The reaction in JPY was negative, while Japanese stocks gained on the outcome, though neither of these moves was massive. In terms of fiscal policy, Abe’s victory implies further fiscal stimulus in Japan, we think, provided that the PM continues pushing for more “Abenomics”. Moreover, we believe that this development increases the likelihood that BoJ Governor Kuroda will be reappointed when his term ends next year, something that may also explain the small tumble in JPY, given that Kuroda is widely regarded as a policy-dove.

USD/JPY gapped up on Monday following Abe’s victory in the Japanese elections. The pair opened above the resistance (now turned into support) barrier of 113.60 (S1), but it was stopped slightly below the critical barrier of 114.30 (R1). Although on Friday the pair broke above 113.25 (S2), a key level that acted as the upper bound of a sideways range that was in place since the 27th of September, we prefer to wait for a clear close above 114.30 (R1) before we get confident on larger bullish extensions. That barrier is the upper boundary of the wider sideways range that’s been in place since the 15th of March. A decisive close above 114.30 (R1) is likely to turn the medium-term outlook to somewhat positive and could initially aim for our next resistance of 114.85 (R2).

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Today’s highlights

The economic calendar is empty, with no major indicators on the agenda. The only event that could attract some attention is a speech by ECB Executive Board member Peter Praet, but given that we have entered the ECB’s “quiet period” ahead of Thursday’s meeting, any comments on monetary policy are highly unlikely.

As for the rest of the week

On Tuesday, Eurozone’s preliminary Markit manufacturing and services PMI for October are due out.

On Wednesday, as we already mentioned above, the Bank of Canada will announce its rate decision. We will also get Australia’s CPI and the UK first estimate of GDP, both for Q3.

The main event will probably be on Thursday when the ECB will deliver its own policy decision. Market focus will likely be on whether the Bank will proceed with a “dovish tapering”, or whether it will set a clear roadmap for ending its asset purchases.

The Riksbank and the Norges Bank will both announce their rate decisions as well.

Finally, on Friday, Japan’s CPI data for September and the US first estimate of GDP for Q3 are both due out.