Looking to the Futures

Diverging Inflation Paths

February 21, 2024 Ryan Hinsen
Diverging inflation readings reaffirm the Canadian dollar’s downtrend.

Yesterday Statistics Canada revealed the country’s inflation continued to get closer to their benchmark goal. The headline CPI m/m did not change at all in January and only at a 2.9% y/y rate. The median CPI – which is most closely watched by the Bank of Canada – rose 3.3% y/y vs 3.6% expected, marking the lowest y/y gain in exactly 2 years. The trimmed CPI (excludes components with extreme price movements to filter out possible factor-specific variations) rose 3.4% y/y – lowest level since November 2021 while the common CPI also rose 3.4% - again lowest reading in almost two years. If you seasonally adjust the data, CPI actually decreased 0.1% for the first time since May 2020.

The most significant factor in last months deceleration was the y/y gasoline prices (-4%) compared with a 1.4% price growth in December. After excluding gasoline, CPI fell to 3.2% y/y last month versus 3.5% in December. The next biggest contributors to the slowdown were food purchased from stores and lower airfares and travel tours. 

Price growth trended lower in 9 provinces with only Alberta experiencing accelerating price growth. However, this is largely due to higher electricity prices compared to the previous January when Albertans received rebates on their electricity bills. 

Canada’s largest trading partner, the United States, experienced a surprise pickup in inflation last month. U.S. core CPI rose 0.4% m/m vs 0.3% expected and 3.9% y/y – the largest monthly increase since last May. The CME Fed Watch tool immediately reflected the change in sentiment. The expectation of a 100-125 basis point rate cut from the Fed was reduced to 75-100 basis points. The rise in US interest rates is a near inverse image of the Canadian dollar futures with a possible even larger divergence between the two countries’ interest rates. 

The March Canadian dollar futures (CDH24) dropped 20 pips on the announcement yesterday then settled around that price throughout the session. The CFTC’s commitment of traders (COT) report for the week ending February 13th revealed that large speculators decreased their net short position by 2,254 contracts to 5,482 contracts as they steadily unwind their large net short position from November. 

Technicals

Looking at the continuous Canadian dollar futures (CD*) we can see a clear downward trend of lower-lows and lower-highs since the turn of the year. This coincides with the rally in US interest rates over that same period. The 14-day RSI is below if 9-day moving average sitting at 44%. Each shorter-timeframe moving average is below the longer-timeframe moving averages. These all indicate the same trend and that the path of least resistance in downward unless there is news or data to change the narrative between the diverging inflation and possible interest rate paths of the two currencies. 

Canadian Dollar March 2024 (CDH24) Chart

Contract Specifications

Canadian Dollar March 2024 (CDH24)

Canadian Dollar March 2024 (CDH24) Specifications

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