Week of April 20, 2015

FEATURED ARTICLE: Loonie rises like Lazarus MARKET STATISTICS: Weekly Change

ECONOMIC STATISTICS:

Canadian Consumer Price Index – March Canadian consumer prices bounced 0.7% in March, raising the annual inflation rate two ticks to 1.2% y/y.

A comeback in gasoline prices (+6.3%) accounted for some of the monthly gain. But core inflation was the bigger story last month, with underlying prices posting a +0.6% m/m, boosting the annual core rate three ticks to 2.4%. Why was the core so strong? The Canadian dollar made its mark big time, as there were rampart signs of currency pass-through scattered across this release.

Meanwhile, sport equipment shot up almost 11%.

Clothing prices jumped 3.5% y/y; travel services were up 5.6% y/y; car prices were up 2.3% in the month.

This report was a surprising report for the Canadian economy. With inflation consistently topping the Bank’s forecast and core holding well above target, the bar for any further rate cut keeps getting higher.

Canadian Existing Home Sales – March Canadian home sales rose 4.1% on a seasonally-adjusted basis in March, the second straight monthly gain and leaving activity up a healthy 9.5% y/y. The drop in mortgage rates and less-harsh weather appears to have stocked buyers in the month, with sales rising in 22 of 26 major cities. The sales-to-new listing ratio rose for a second straight month, but is still slightly below the 10-year average. The average transaction price jumped 9.4% y/y.

The housing market got a jolt in March. Outside of Toronto and Vancouver, the bulk of Canada’s local markets look healthy.

United States Housing Starts and Building Permits – March U.S. housing starts rose just 2.0% in March to a 2-month high of 926,000 annualized, or 2.5% below year-ago levels. This is well below the expected double-digit rebound. Building permits, an indicator of future starts, fell a more-than-expected 5.7% in March, the first decline since October. However, there were fewer permits for multi-homes (-15.9%) while the more important singles category rose 2.1%.

Ideally, there would be more momentum than reported.

The Canadian dollar reeled off its best weekly gain in four years, popping 3% from last Friday’s close. The currency’s impressive move was stoked by four separate factors that seemingly came together in a oneweek blizzard of helpful news for the previously beleaguered bird.

Firmer oil prices. There is little doubt that the 50%+ slice was the root cause of the 16% plunge in the Canadian dollar in just nine months. Over the past week, WTI was up 8% on the week, touching a 2015 high of $57 at one point. Brent made a broadly similar move to around $64, with both drifting above the Bank of Canada’s assumption for the year.

A less dovish BoC. The Canadian dollar had already weakened by nearly 10% at one stage last year even before oil prices began to sag, and some of that was due to the change in tune from the Bank of Canada under Governor Stephen Poloz. The currency was also walloped in mid-January this year by the Bank’s shocking rate cut. Any sign that the Bank of Canada is starting to pull back from its dovish tendencies is good news for the Canadian dollar, and we saw a big dose of that this week. In its Monetary Policy Report, the Bank asserted that the oil shock was hitting the economy harder up front. This call has resulted in the market no longer expecting a 25pt rate cut.

A softer US$. Another driving factor behind the two-year drop in the Canadian dollar has been the relentless rise in the greenback over that spell. The loonie wasn’t even close to being the weakest currency in the past year, with the euro, Brazilian real and Swedish krona taking that crown. However, with the U.S. economy stumbling out of the gate in 2015 and some Fed officials suddenly sounding a bit gun-shy on possible June rate hikes, the greenback has stalled, for now.

Stronger Canadian economic data. After a challenging run in the first three months of the year, Canada’s economic data have suddenly started surprising to the high side. Following the previous week’s decent job gain for March, last week brought robust home sales and consumer price inflation for the same month.

Some of the past week’s changes could persist for some time, prompting the market to shift its near-term view on the Canadian dollar, although there isn’t much change in the view for 2016. The biggest wild care remains oil; if its recent rally for real, and builds further momentum, the Canadian dollar outlook will move in lockstep.

Canada Wholesale Trade – February - Tuesday, April 21, 2015 at 8:30am

United States Existing Home Sales – March - Wednesday, April 22, 2015 at 10:00am

U.S. Real GDP by Industry – Q4 - Thursday, April 23, 2015 at 8:30am

U.S. New Home Sales – March - Thursday, April 23, 2015 at 10:00am

U.S. Durable Goods Orders – March - Friday, April 24, 2015 at 8:30am

Team-Wide Meeting - Thursday, April 23, 2015 at 3:30pm