The Canadian dollar gained across the board on Friday on the back of stunning inflation data that smashed market expectations. Meanwhile, the Mexican peso continues to be this year’s best performing currency; it firmed again on Friday on rumours that Washington would soon agree to a compromise on Mexican farm exports.
Inflation in Canada has risen to 3.0 percent for the first time since 2011, Statistics Canada announced on Friday.
The news sent the Canadian dollar nearly a cent higher against the US dollar to 1.306 and it firmed across the board. Data covered the year to July, which economists had forecast at only 2.5 percent, matching June’s print. This time last year, inflation in Canada measured only 1.0 percent.
Contributing most to booming prices in Canada is energy, which, as a whole, now costs 14.2 percent more than it did a year ago. Gasoline in particular is weighing on consumers’ pockets; that’s 25 percent more expensive this year.
Before affirming expectations for Bank of Canada rate hikes, a consideration of “core” inflation (which disregards volatile energy and food components) is necessary, and that posted a seventeen-month high of 1.6 percent, twice its value a year ago.
All good for the loonie then?
“While there is a lot to like about CAD based on domestic fundamentals, we note macro data is the only bright spot,” wrote ING on Saturday.
ING cite the oil price, which has shed $8.60 over the past five weeks amid concerns over inventory build-up, and geopolitical uncertainties as reasons to favour CAD stability rather than appreciation in the short-term.
“Our short-term USD/CAD fair value model estimate is 1.28-1.30, although we’ll need some of these external risks to fade before we see a move in this direction [below 1.30].”
As for CIBC: “While the Canadian dollar may continue to outperform in the near term as we get closer to an October BoC rate hike, it could be an underperformer come 2019 as trade deficits with the rest of the world weigh.” Deficits, CIBC suggest, will be a result of CAD’s climb to a long-term high against a basket of non-USD currencies.
NAFTA continues to be the centerpiece of CAD news flow and it is perhaps disheartening to see Canada pushed to the sidelines in three-way negotiations with the US, to which it ships 80 percent of its exports, and Mexico. Others will see Washington’s ability to strike a compromise this week with Mexico over its farm exports as a reason for optimism. If Trump can come around with a country he once accused of “stealing American manufacturing jobs,” a thawing of the current frosty US-Canada relationship might be around the corner.
In an interview with Bloomberg TV this week, Adam Button, chief analyst at ForexLive, said that USD/CAD wouldn’t see much beyond 1.25 upon a US-Canada trade deal. Button sees CAD appreciation limited because, he says, a deal is mostly priced in. Button referenced the loonie’s position as the best performing G10 currency since July 1st.
On the other hand, analysts speculate that Canada’s currency might lose as much as 10 percent of its value should negotiations completely unravel.
The Mexican peso firmed on Friday on the aforementioned trade chatter to 18.86 per US dollar. The peso is 2018’s best performing currency, being one of only two to gain against the greenback (the other being the Japanese yen). The peso is up 4 percent this year but a whopping 11 percent since mid-June.