“December CPI unexpected moved higher to 2.0% y/y (consensus: 1.7%), despite a notable drag from energy prices,” point out TD Securities analysts.
“The upside surprise was due to one-off factors (especially air transportation) and exchange rate pass through, and is unlikely to persist into 2019. By contrast, the BoC’s core inflation measures were marginally softer on balance (averaging 1.87% y/y) following revisions to the November figures.”
“The CAD caught a modest bid following the positive headline surprise. This should be faded however as the average core measures remain unchanged and today’s print will do little to move the needle for the Bank of Canada, which has committed itself to the sidelines for some time. Importantly, we have noticed that the traditional drivers for USDCAD have become less influential as of late. While rate spreads remain a key anchor overall, its beta has diminished considerably in recent weeks.”
“That could be due to the Bank’s more patient approach to policy (suggesting a series of data improvements are required to re-ignite the rate hike debate and hence CAD). Meanwhile, the oil beta has seen an uptick, but our moderately bullish view on WTI in the coming months does not imply a major impetus for CAD appreciation. Finally, USDCAD has also seen its risk beta moderate as well. All told, this suggests a muddle through scenario in the coming weeks for USDCAD, with good work put in to carve a base near 1.3180. 1.3350 remains a key topside pivot.”