Canada Inflation Talking Points:
- The May Canada inflation report (consumer price index) is due on Wednesday, June 19 at 12:30 GMT.
- The pullback in oil prices in recent weeks appears ready to put a cap on the rebound in Canada inflation.
- Retail tradersare net-long USDJPY and net-short USDCAD, suggesting that the Japanese Yen will rally and the Canadian Dollar will fall in the coming days.
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06/19 WEDNESDAY | 12:30 GMT | CAD Consumer Price Index (MAY)
The pullback in oil prices in recent weeks appears ready to put a cap on the rebound in Canada inflation – no different than what’s being experienced across the rest of the developed economic world. Crude oil prices plunged by -15.9% in May, weighing significantly on the yearly performance: at their peak, crude oil prices were up by 46.7% in 2019; at the time of writing, they were only up by 16.2% in 2019.
Accordingly, a Bloomberg News survey shows consensus forecasts pointing to headline May Canada inflation duein at 2%(y/y), unchanged from April’s pace of price pressures.The monthly reading is due in at 0.1% from 0.4% (m/m), clearer evidence disinflation is starting to appear.
It still holds that improvement in energy markets will help the Canadian Dollar and inflation rebound hand-in-hand. As such, traders should keep expectations low for a policy change from the Bank of Canada any time soon; expectations have moved lower in recent months. On June 14, overnight index swaps were pricing in only a 1.5% chance of a 25-bps rate cut by July; three months earlier, on March 14, odds of a July rate cut were 13%.
CADJPY Technical Forecast: Daily Price Chart (July 2018 to June 2019) (Chart 1)
After rebounding at the start of June, CADJPY prices appear to be ready to turn lower anew. Trading in a downtrend since peaking in April, CADJPY tried earlier this week to break the series of lower highs and lower lows. The failed bullish breakout attempt now puts focus on a return lower in the channel, now that CADJPY prices have fallen back below their daily 8-, 13-, and 21-EMA envelope as well. First support comes in play near the June 6 bullish outside engulfing bar low at 80.53, then the June low at 79.97. Only a move back above the EMA envelope as well as the downtrend from the April high will warrant a reconsideration of the bearish bias for CADJPY prices.
IG Client Sentiment Index: USDCAD (June 14, 2019) (Chart 2)
USDCAD: Retail trader data shows 40.8% of traders are net-long with the ratio of traders short to long at 1.45 to 1. The percentage of traders net-long is now its lowest since June 5 when USDCAD traded near 1.34219. The number of traders net-long is 12.8% lower than yesterday and 21.7% lower from last week, while the number of traders net-short is 8.7% higher than yesterday and 7.8% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at email@example.com