DB FX Daily: London Canadian CPI Next Major Event For USD/CAD

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FX Daily: London
Canadian CPI Next Major Event For USD/CAD
Today's Key Data and Events
CAD Canada core CPI for April, 2.3% y/y expected (11:00 GMT)
USD US weekly jobless claims (12:30 GMT)
USD Philadelphia Fed index for May, 4.0 expected (16:00 GMT)

Upcoming Event Risks
May 18-19: G8 Finance Ministers Meeting
May 22-24: US-China Strategic Econ. Dialogue
May 29: Bank of Canada rate decision

No JPY Turnaround from GDP Data
Today's Japanese Q1 GDP data reported a slightly softer than expected increase in real GDP of 0.6% qoq (2.4% annualised) - the market was looking for a rise of 0.7% (2.7% annualised). There was notable weakness in private capital investment down 0.9% qoq (consistent with the weakness in the monthly machinery orders data recently), while compensation of employees fell 0.1% qoq. The GDP deflator fell 0.3% qoq, although the yoy decline of 0.2% was better than the 0.4% decline the market was expecting. Nonetheless, rate markets focused on the negative aspects of the report, with 10-year JGB yields drown 3-4 basis points. With rates markets elsewhere under pressure, this has seen rate differentials moving in a JPY-unfriendly direction.

Canadian CPI Next Major Event For USD/CAD
The major data events in Canada this week will likely be today's CPI report, especially given the past two have been higher than the market was expecting. Our Canadian economist (and the market) is looking for a 0.3% mom increase, bringing the annual rate down from 2.3% to 2.1%, while core inflation is expected to rise 0.1%, with the annual rate unchanged as increases in transportation costs offset a further slowing in year over year home ownership costs. From a currency perspective, we suspect an outcome in line with these expectations or lower may see USD/CAD continue its bounce from sub-110 levels. Underlying this is that the decline of recent weeks, while supported by changing sentiment on rate outlook, does appears to have got a little ahead of the levels suggested by interest rate futures (see the second chart below). Perhaps more telling in the next near term though is the loss of momentum in the commodity rally, with both base and precious metals having come under ressure this week. Potentially compounding these factors is that speculative positioning has swung from net short to net long in recent weeks, opening scope for a positioning unwind to add to any bounce in USD/CAD In the absence then of an upside surprise from either the inflation report (or tomorrow's retail trade report) a move towards 1.12 may be on the cards. The medium-term backdrop for CAD remains favourable however. Global growth remain strong, while the possibility that US manufacturing is emerging from a slowdown, as suggested both by the recent ISM report and also the recent US inventory data, would also be positive for CAD. So we would view a move to the 1.12 level as an attractive selling opportunity.