CM – Canadian CPI is still high, but does it matter before the FOMC today?


Joe Perry
June 16, 2021 3:31 PM

Inflation is in the foreground of everyone these days. Canada released its May CPI data earlier. Headline print came out as expected at 3.6% YoY versus 3.4% in April. However, the core CPI was stronger than expected at 2.8% versus 2.5% and 2.3% expected for April. Remember, the Bank of Canada left its bond purchase program unchanged last week at $ 3 billion a week. Today’s report confirms what we already knew: inflation is high while employment is low. The last 2 employment change releases for Canada were both worse than expected. However, with payroll data released in June ahead of the next BOC meeting, central bank officials are hoping for more pressure. Further tapering of bond purchases is expected at the next BOC meeting on July 14th.

Today’s data from Canada is consistent with the same picture we see in the US: high inflation, worse than expected employment data. But the Federal Reserve is much further behind the BOC in curbing its bond purchases. The Fed is currently buying Treasuries and MBS worth $ 120 billion a month. Of course, the FOMC’s big decision today won’t be whether or not to taper, but whether to talk about rejuvenation at all! The Fed has repeatedly said that current inflation is temporary and that it will “run hot” on inflation while it focuses on maximizing employment. After 2 months of non-farm payroll since the last FOMC meeting, will the Fed have enough positive data to signal that they will talk about tapering? In addition, FOMC members will publish growth and inflation forecasts. If members expect inflation to be higher than they previously forecast, will they be given enough information to talk about tapering? Check out our full Fed preview by Matt Weller here.

USD / CAD has been the story of two completely different monetary policies since April 21st. With the rejuvenation of the BOC and the US on hold, the Canadian dollar had been higher in one direction. But should that change? USD / CAD has been moving in a wedge formation since the March 2020 pandemic highs. When the BOC tapered on April 21st, USD / CAD was on the upper trendline on the wedge near 1.2654. The pair has since moved aggressively down as Canadian and US monetary policies diverged. USD / CAD had a false break below the lower trendline of the wedge, hitting a low of 1.2007 on June 1st. The price then traded sideways, biding its time while traders waited for more information. On Friday, traders began taking profits and selling short ahead of today’s FOMC meeting. Yesterday the price was trading at its highest level since May 6, near 1.2204.

On a 240 minute timeframe, USD / CAD has been moving up in AB = CD formation since June 9, mainly due to position squaring prior to today’s session. USD / CAD encountered resistance at 1.2200 yesterday. The target for the formation is point D, which coincides with the horizontal resistance and the 38.2% Fibonacci retracement level from the highs of April 21st to the low of June 1st. The resistance above it is at the 50% retracement level of the same timeframe at 1.2334 and then at the horizontal resistance at 1.2366. Initial horizontal support is at yesterday’s low at 1.2132, then at the June 1st low at 1.2006. Below that, USD / CAD can drop to 1.1917, the lows from April 2015!

As today’s CPI data from Canada confirms what many already knew (high inflation, lower employment), the BOC has to agree their next session decide whether to go back or get the can on the way. Today, however, the FOMC will have a chance to decide whether to signal to markets that they are about to start reducing by « talking about » it. After the FOMC statement and press conference, watch out for volatility, especially with USD / CAD!

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