The Canadian dollar has spent much of today’s European session retracing yesterday’s losses as events in China begin to stabilise. However, the release of June’s CPI data has trimmed the loonie’s rally as inflation data begins to moderate and embolden claims that the overshoot is in fact transitory.
Headline CPI printed at 0.3% MoM and 3.1% YoY in June, down from May’s readings of 0.5% and 3.6% respectively, while the average of the Bank of Canada’s core CPI measures also fell from 2.3% to 2.2%.
Price growth moderated in half of the measured categories, with clothing and footwear leading the slowdown.
While the inflation reading is unlikely to derail the Bank of Canada from tapering its QE programme by C$1bn every other meeting, the reaction in financial markets suggests that expectations of the normalisation process as a whole have been cooled down. Canadian front-end yields have fallen from session highs, while the loonie has trimmed gains on the day.
USDCAD trims gains as inflation data surprises to the downside, cooling expectations of a more aggressive pace of policy normalisation
Author: Simon Harvey, Senior FX Market Analyst