Expert Commentary: Focus on Canadian Economy and CAD

Latest reports revealed that the Consumer Price Index for July remained at about the same level it was seen back in June, when it was reported to have increased 1.2% y/y/. Is it reasonable to expect a higher inflation in the next quarter?
 

Yes, we do see inflation in Canada grinding higher in the next 3-6 months, though it is going to be a slow track up to the bank's 2% target. Some of the weaknesses has occurred due to temporary factors that are likely going to reverse to some extent in the nearest future. At this point, we continue to believe that the economy is operating at a relatively high level and that the growth will create modest inflation pressure.

In your opinion, what events could convince the Bank of Canada to raise interest rates again this year?

I do believe that the key thing here is inflation: we need to see the CPI inching a little bit higher. However, even if it stays at about the same level, that does not rule out another Bank of Canada rate hike, but if inflation falls, that could force the BoC to stick to a more cautious approach. Still, our general view is that if we see global economic and financial conditions remaining on track, with no nasty surprises, paired with reasonably safe and modest track of inflation, the Canadian central bank would be hiking rates again this year.

What is your forecast for USD/CAD performance for the next quarter?

We see the Canadian Dollar pulling back a little bit over the course of the next quarter. We anticipate the Loonie to fall back to about 78 cents, which is not a huge drop, but still a pull back, as we expect to see another Federal Reserve rate increase in December.

Derek Burleton 

VP and Deputy Chief Economist at TD Bank