Summary:

• Signs of deflation in Canada last month for the first time this year
• Core retail sales also fall back into negative territory 
• Immediate reaction in CAD positive however, perhaps due to low expectations

The last scheduled major economic release of the week has seen a fall in both inflation and consumer spending metrics in Canada. The CPI M/M reading showed a drop of 0.1%, with, which is a return to negative territory after a 0.1% rise last time out. However, the reading was in line with forecasts and the small scale of the drop has failed to weigh on the Canadian dollar. In year on year terms the reading has dropped by 10 basis points to 1.0% and there has been a marked decline since the 2% plus readings that were seen at the beginning of the year.  

 The headline inflation outlook in Canada has deteriorated significantly since the start of the year

However, many traders look through headline reading sand focus on “core” releases as they are believed to give a fairer overall view of the underlying trend. The “core” reading for Canadian CPI was replaced earlier this year by three alternatives that are intended to provide a truer reflection of the underlying inflation dynamics in the economy. Of these three, two of them (common CPI Y/Y and Median CPI Y/Y) both actually roe since there last release. Due to their relative infancy there is no widely viewed consensus for these but a rise, albeit of 0.1% in each case, could be seen as outweighing the decline in the headline. It is also worth noting here that the third new “core” measure (trimmed CPI Y/Y) remained the same as the prior reading. 

As far as the retail sales release was concerned the picture was mixed with the headline M/M beating expectations to come in at 0.6% (+0.3% expected) but the core reading unexpectedly contracted (-0.1% vs 0.0% expected). 

The headline retail sales number for June beat forecasts, coming in at +0.6%. However core retail sales showed an unexpected contraction to -0.1% m/m 

 Overall there is no overriding sign of weakness or strength in the Canadian economy from these latest releases with a case to be made for them, on balance, being positive or negative.

 The headline readings for inflation and retail sales are sending mixed messages on the Canadian economy

Despite this, the initial reaction has seen CAD strengthen with the recent uptrend remaining intact for now. USDCAD has declined sharply in the past couple of months after reaching a peak just shy of the 1.38 handle in early May. Price is now approaching a potentially major support around 1.2455 and this area could be worth keeping a close eye on in the coming sessions to see if it attracts buyers back into the downtrending market.

 USDCAD has been dropping for several weeks now after breaking a rising trendline. Price is approaching potentially key support at 1.2455