Headline CPI (YoY) (SEP) (11:00 GMT; 07:00 ET)
Expected: 2.5%
Previous: 1.7%

Bank of Canada Core CPI (YoY) (SEP) (11:00 GMT; 07:00 ET)
Expected: 1.9%
Previous: 2.2%

How Will The Markets React?

The release of Canadian CPI data will wrap up a week chock full of inflation figures, and similar patterns are anticipated to emerge. The headline CPI reading is expected to jump to an annualized rate of 2.5 percent, the fastest pace in more than a year, while the Bank of Canada’s core CPI measure is anticipated to fall below the inflation target of 2.0 percent to 1.9 percent. The divergence will be the result of huge increases seen in energy and food prices, as oil rocketed above $80/bbl during September and wheat futures surged to record highs. As a result, the core CPI figure which excludes these volatile items will actually ease back, in line with the central bank’s forecasts. In fact, the Bank of Canada’s monetary policy statement released this week noted that inflation would return to target sooner than expected, as tighter credit conditions and the rapid appreciation of the Canadian dollar quells growth, allowing excess demand pressures to “gradually dissipate.” As a result, the central bank judged that the current benchmark interest rate of 4.50 percent “is consistent with achieving the inflation target.” If Friday’s inflation data proves to be unexpected, the Canadian dollar is likely to respond immediately, though its reaction may be more severe in the case of an upside surprise. Canadian government bonds, on the other hand, may show a sharper response to soft CPI figures.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bond futures continue to trek higher, similar to gains in US Treasuries, as both the Bank of Canada and Federal Reserve are widely perceived as being dovish (especially the US central bank). On Friday, core CPI is anticipated to fall back while headline CPI is expected to surge, but the core measure will likely carry more weight with the markets as this figure is used to determine monetary policy by the Bank of Canada. As a result, CGB’s could move even higher to target 112.50. However, if the inflation data proves to be stronger-than-expected, CGB’s could pull back towards trendline support.

FX – USD/CAD

While USD/CAD declines have slowed dramatically since hitting a new 31-year low of 0.9706 just a few days ago, the pair still remains stubbornly within a downtrend. With the greenback weak across the forex markets, gains for USD/CAD have been difficult to come by. Nevertheless, inflation figures almost always have the potential to be market movers, and Friday’s Canadian CPI release is no exception. Though the headline CPI reading is anticipated to hit the fastest pace in over a year, the core measure that is used by the Bank of Canada to make monetary policy decisions is expected to fall below the 2 percent target to 1.9 percent. The news could help give USD/CAD a boost towards resistance at 0.9820, as the central bank has already noted downside inflation risks, signaling a more dovish tone. On the other hand, if the inflation data proves to be stronger-than-estimated and oil continues to trade at record highs, USD/CAD could continue to march within its descending channel towards 0.9665.

Equities – S&P/TSX Composite Index

Canadian equities continue to climb higher within an ascending channel, though the S&P/TSX Composite Index has yet to reach the July record of 14,646.82. However, resistance looms just above the 14,400 level, which could limit additional gains in the near term. Nevertheless, Friday’s Canadian CPI data could allow the equity index to push higher for a test of resistance, as core inflation is anticipated to have eased during September. The news would highlight the Bank of Canada’s more dovish tone, and while they are not expected to cut rates anytime soon, the data may leave the S&P/TSX ending the week on a more bullish note.

Terri Belkas is a Currency Strategist at FXCM.