CADJPY: Ahead of Canadian CPI

The CPI figures for Canada will be closely watched today, as predictions point to an increase. Headline inflation is forecast at 3.8% y/y, up from 3.3% y/y in July. If this happens, it will be the third consecutive month that the inflation rate has increased, reaching the highest level since April and far exceeding the Bank of Canada’s target of 2%. The increase in monthly CPI is expected to slow from the 0.6% recorded in July to 0.2%.

The interaction of base effects and rising energy prices is thought to be the cause of the surge in inflation in August. However, diverse service costs pose the most obvious positive risk. Core inflation indicators will of course take centre stage. Moreover, a three-month jump in the inflation rate would logically increase the likelihood of another rate hike by the BOC, perhaps as early as October.

In a speech in the first week of September, Governor Tiff Macklem clarified the bank’s position, saying that while “monetary policy may be quite restrictive”, the bank expects to see “less generalised price increases” in addition to a decline in average price increases.  If the bank fails to notice this pattern, it may be forced to consider raising the policy rate once again, especially if inflationary trends continue.

In the FX Markets, the Canadian Dollar has shown strength this month, fuelled by a surge in oil prices. Fellow commodity currencies the Australian Dollar and New Zealand Dollar look heavily weighted by China’s economic growth. This can be seen from the AUDCAD and NZDCAD pairs continuing to show weakness in the -1% range just this month. From the January 2023 peak, AUDCAD and NZDCAD have weakened by more than -9%.

Meanwhile against the Yen, with its super loose monetary policy, the CADJPY pair continues to accelerate past the 109.49 resistance mark recorded in late June. This continued rally may soon approach the 2022 peak at 110.52. A strong breakout there would confirm the resumption of a larger uptrend with a projection of FE61.8% [from 94.06-109.49 drawdown and 104.20 at 113.74]. However, the near-term outlook will remain bullish as long as there is no policy change at this week’s BOJ meeting.

For now, the hurdle at the 110.52 resistance zone will be the crucial level between a continued breakout or a significant reversal in the triple top pattern.

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Ady Phangestu

Market Analyst – HF Educational Office – Indonesia

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