Summary:

• Canadian CPI M/M drops by 0.4% 
• Bigger decline than expected (-0.3%) and prior (+0.3%) 
• CAD falling lower against all peers other than USD

The latest inflation data from Canada has shown a larger than expected drop and may weigh on the mind of the BoC when deciding upon any further rate increases. The CPI M/M reading for December came in at -0.4% compared to -0.3% expected and a prior reading of +0.3%. 

With the core reading previously used by Statistics Canada deemed a poor reflection of underlying price pressures and average of three other “core” readings (trimmed, median and common) can be viewed as a truer gauge. This average actually increased in the latest release and suggest that maybe the decline in the headline is an over reaction.   

 Whilst the CPI Y/Y declined the average of 3 core measure increase in December. Source: XTB Macrobond

Despite the “core” reading taking the edge off a poor headline the Canadian dollar has reacted negatively to the release and is currently trading lower against all of its peers barring the USD. The CADJPY is one pair involving the Loonie which currently trades at an interesting level with the market declining today to retest its 200 day SMA.  

 CADJPY has fallen back to its 200 day SMA having traded above this indicator for the past 7 months. A drop below could be seen to signal an end to the uptrend. Source: xStation

The 200 day SMA has acted as a fairly good trend identification tool in recent years with the market heading on prolonged runs after breaking above or below it. A trendline taken form the November 2016 lows is also being tested in today’s decline and a break below here would be a further negative signal and could also be seen to signal that the uptrend is coming to an end. 

 CADJPY is testing a rising trendline going back to 2016. A break below here would be a negative development. Source: xStation