Limited CAD downside potential if inflation for housing remains elevated – Commerzbank

Canadian inflation data for November is due for publication today. Economists at Commerzbank analyze Loonie’s outlook ahead of the Consumer Price Index (CPI) report.

How much scope is there for a downside surprise in inflation?

Housing prices are still rising notably, no doubt also as a result of rate hikes. It is of course possible that the prices for this category fell significantly in November, but the stubbornness witnessed over the past months makes that seem unlikely. For the Bank of Canada (BoC) that is bad news for two reasons. First of all, the population is negatively affected by high mortgage rates, which increases the pressure on the BoC to lower interest rates again soon. On the other hand, stubborn inflation rates also reduce the scope to give in to this pressure though.

That does not mean that inflation will not fall more notably than expected today and that CAD will come under pressure as a result. But in my view, it is worth taking a closer look at the data to be able to tell how much scope the BoC will have for possible rate cuts. If the market shares this view – and if inflation for housing remains elevated – downside potential is likely to be limited.