- Canadian inflation expected to have cooled in November.
- Bank of Japan leaves policy unchanged.
- US dollar trades defensively but yen rallies hard.
USDCAD: open 1.3385-89, overnight range 1.3391-1.3403, close 1.3400, WTI $72.92, Gold, $2025.67.
The Canadian dollar open ed little changed from yesterday and remains locked in a 1.3350-1.3420 range ahead of today’s November inflation data.
The consensus estimate is for November CPI to have fallen by 0.2% m/m and to 2.9% y/y from 3.1% in October. That’s good news but the more important numbers are the Bank of Canada’s CPI-trim and CPI- medium. They need to continue to move lower to encourage policymakers to lower interest rates.
That may not be easy. Governor Tiff Macklem is concerned about the “stickiness” of prices in some categories. In is speech on Friday he said, “Food price inflation has eased but is still about 5½%. That’s hurting everyone—especially lower-income Canadians. Inflation in the prices of nondurable goods excluding food and energy—things like cleaning supplies or personal care items—is running about 4½%. And inflation in the cost of shelter services has risen to almost 7%”. He added “Unless the pace of price increases in these big categories slows, it’s going to be hard to get overall inflation down to the 2% target.”
The Canadian dollar will see a bit of volatility when the data is released, but the impact will quickly fade as it is the outlook for US monetary policy that is driving FX markets, and USDCAD trading.
FX markets were not quite silent, and all wasn’t calm overnight. You can thank the Bank of Japan for that. BoJ policymakers dropped hints that the era of negative rates would be coming to an end, following the October monetary policy meeting. Analysts expected a somewhat hawkish outcome from today's meeting, but it did not happen. The BoJ left interest rates unchanged at -0.1% and did not alter the yield curve control strategy. USDJPY soared on the news and rallied from 142.25 pre-meeting to 144.96 in NY today.
EURUSD firmed in a 1.0915 to 1.0949 band. Eurozone Harmonized inflation was as expected (actual 2.4% y/y vs 2.4% y/y in October).
GBPUSD traded in a 1.2636-1.2710 range, underpinned by talk that UK rates will be unchanged next year.
AUDUSD drifted in a 0.6701-0.6734 range, with traders ignoring the release of the RBA minutes.
Canada raw materials and Industrial Product Price Index data is ahead. US data includes building permits and housing starts for November.
