The Bank of Canada (BOC) Interest Rate Decision at 7am PST (10am EST) tomorow is the first statement issued since the uptick in inflation on March 27th.
Interestingly, this uptick in CPI seems to be a seasonal phenomenon, with similar spikes in inflation seen in March 2010 and April 2011. Even so, this high inflation number further strengthened the downward trend in the USDCAD (FXC) exchange rate, which had started with March 8th's employment numbers.
These events reversed the weakening trend in the CAD from the beginning of the year when it was trading above parity with the USD.
The appreciation is understandable as the two previous BOC statements January 23rd and March 6th show that the high CPI numbers at the end of March caught them off guard.
From the January 23th BOC statement:
Core inflation has softened by more than the Bank had expected, with more muted price pressures across a wide range of goods and services, consistent with the unexpected increase in excess capacity. Total CPI inflation has also been lower than anticipated, reflecting developments in core inflation and weaker-than-projected gasoline prices.
And from the March 6th BOC Statement:
Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs, which were only partially offset by higher gasoline prices. Low core inflation reflects muted price pressures across a wide range of goods and services, consistent with material excess capacity in the economy.
On the employment front, the April 5th employment numbers were far below expectations, with a loss of 54,500 jobs across Canada and an increase of 0.1% in the unemployment rate. The unemployment rate increase is a red herring though, as much of that can be attributed to the increase in the participation rate.
These poor employment numbers were partly offset by the strong Ivey Purchasing Managers Index results, which came in far above expectations of 52.40.
Source: Ivey PMI
What to look for from the BOC
The probability of a rate increase, especially with the poor employment numbers last month is essentially 0. Therefore, any impact on the USDCAD will be from the monetary policy statement.
Although the BOC was caught off guard with the high CPI numbers March 27th, given the correlation with past seasonal spring CPI increases, it is too early to conclude that there is a new trend in the CPI that would warrant a rate increase or hawkish BOC statement. Also, the next reported CPI falls on April 19th, and I guarantee that the BOC has already seen those numbers. If the seasonality hypothesis holds and the CPI numbers that are published Friday meet the low expectations, I expect there to be a dovish statement from the BOC that will cause a weakening in the CAD.
I haven't initiated a trade as of yet, but if I do, it'll be to short the CAD ahead of the BOC meeting.
Additional disclosure: I am actively trading the FOREX market and may be either long or short the CAD at the time of this article's publication. To see a complete list of my open FOREX trades in real time, visit mcnultycapitalmanagement.com/