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Canadian core inflation climbing – Rabobank

FXStreet (Barcelona) - Jane Foley, Senior Currency Strategist at Rabobank, notes Canada’s headline inflation have been flirting with the 2% level since April this year and core inflation is creeping higher suggesting an improvement in underlying demand in the economy.

Key Quotes

“Canadian headline inflation has been flirting with the 2% level since April this year. The BoC has implied that this was the result of temporary factors such as higher energy prices early in 2014 and last year’s softening in the value of the CAD.”

“While headline inflation did start to ease in the summer, apparently following the BoC’s script, price pressures appear to be building again with last week’s Oct CPI release registering a stronger than expected 2.4% y/y despite market predictions that falls in energy prices would keep a cap on headline inflation. Price pressures in the BoC’s key core CPI have been a little less assertive this year.”

“However, following October’s stronger than expected 2.3% y/y release the BoC’s 2% target has now been breached for 3 consecutive months. The fact that core inflation is creeping higher is suggestive of an improvement in underlying demand in the economy on the back of the brightening labour market.”

“The Canadian economy appears to be finding support from both the BoC’s accommodative policy setting and from the strengthened performance of its US neighbour. Despite the relative strength of the North American economies, however, the clouds have thickened over other parts of the globe in recent months specifically the Eurozone, Japan, China and Russia. Consequently the BoC is likely to maintain is cautious policy outlook for now.”

“However, we maintain our projection that the BoC could be announcing its first rate hike of the cycle in Q3 2015. In our view, the BoC could find itself hiking rates ahead of the Fed who we expect will keep policy rates steady until Q4 2015.”

“For this reason we see scope for some outperformance of the CAD vs. the USD into the middle of next year and see scope for a temporary drop towards the USD/CAD1.10 area on a 6-9 month view.”

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