Canadian CPI comes out stronger than anticipated

During the trading session on Wednesday, we received Canadian CPI figures month over month, which came out much stronger than anticipated. This of course had a positive effect on the Canadian dollar immediately, as this was a bit of a shock to the marketplace. Of the figures that came out, only Median CPI was as expected. Everything else came out higher. The numbers were a headline of 0.5% CPI month over month, as opposed to the 0.1% expected. Common CPI also came out at 1.9%, as opposed to expected 1.8% by most analysts. Core CPI came out at 0.3%, which shows that inflation is still there although it isn’t necessarily as strong as one would hope.

This throws Canadian monetary policy into disarray

The Canadian monetary policy was expected to be loose going forward, and quite frankly the fact that CPI is stronger than anticipated, it seems as if inflation is going to be higher than anticipated, and therefore it should for a lot of questions as to what Ottawa will do next, as this economic announcement flies in the face of conventional wisdom. After all, we have seen a lot of weakness in the oil markets, so it makes sense that the Canadian economy could suffer. At this point, it’s very likely that the questions will continue with monetary policy, but the question now is whether or not it will be coming sooner rather than later. I doubted, and this could give a little bit of a boost towards the Canadian dollar, at least in the short term.

However, there will continue to be issues

Traders will now start to focus on global growth again, and as a result the Canadian dollar could suffer at the hands of what has been very weak global demand not only for crude oil, but just a lack of economic activity. As the world looks likely to enter a recession, it’s very likely that the Canadian dollar will continue to be in the crosshairs of traders looking to avoid trouble. At this point, traders will start to parse announcements and statements coming out of the Bank of Canada, which has been relatively standoffish when it comes to monetary policy going forward.

Race to the bottom

All of this being said, central banks around the world are racing to the bottom as far as rates are concerned. The Canadian economy does have to deal with a housing bubble that is popping, and that of course could cause quite a bit of negativity towards the Loonie as well. You will see more bifurcation due to the announcements, as the US dollar, the measure that most traders will look to in order to understand relative strength, will probably continue to be stronger than its northern neighbor. However, as CPI numbers have come out so hot in general, the Canadian dollar will probably do relatively well against some other currencies that aren’t considered to be safety currencies, such as the Australian dollar, New Zealand dollar, British pound, and the like.