CAD: Setting up for retail sales (August) and CPI (September) - TDS

Research Team at TDS, suggests that the joint release of Canada’s August retail sales and September CPI occurs in the absence of any US data and while CPI inflation will be of focus given the Bank of Canada’s recent downgrade to the inflation outlook while the August retail sales provides the first read on the impact of the Child Benefit stimulus, which the Bank of Canada expects to give a decent lift to spending though we hold a more cautious view.

Key Quotes

“Retail Sales: The combination of stronger industry-reported auto sales and fiscal stimulus should help to lift retail sales activity by 0.3% m/m in August. Excluding the impact of motor vehicle sales, retail activity is expected to grow by a more modest 0.1% m/m. Core retail activity will benefit from the Canada Child Benefit cheques that were mailed in late July, although survey data has indicated that little of the additional income will go towards new spending. Meanwhile, lower seasonally adjusted gasoline prices and the sharp drop in existing home sales will have a negative impact on core retail activity.

CPI: The September CPI release will receive elevated attention this month after the Bank of Canada slashed its inflation outlook following a sharp deceleration in August core inflation to 1.8% y/y. We look for some recovery in September on the back of higher energy prices as well as recovery in certain categories that contributed to the August weakness. TD looks for a 0.2% m/m increase, lifting the headline inflation rate to 1.4% y/y vs 1.1% y/y in August on favourable base effects. In the core, we look for rebounds in the recreation/education/communication and alcohol categories along with a pickup in other components such as shelter to fuel a 0.2% m/m increase. That should leave the core inflation rate unchanged at 1.8% y/y.

Foreign Exchange

We expect to see little upside in CAD on the data release. Indeed, given the BoC’s reinforcement of its dovish bias we think CAD is more vulnerable to downside misses than upside surprises. Recall that the BoC placed much emphasis on the implementation of the fiscal stimulus to boost consumption, leaving CAD sensitive to any weakness in domestic demand. Even on a good number, we think it will take a few rounds of consumption data to indicate that the stimulus effects are adding momentum. For USDCAD, we think the BoC’s tone enhances the 1.30 floor, and we think dips will remain brief. We keep our sights on another stab at 1.33 but doubt this level will continue to hold for too much longer.”