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Highlights:

• The year-over-year rate of headline CPI inflation rose to 1.4% from 1.2% in July - largely because of an increase in energy prices.
• 2 of 3 of the Bank of Canada's preferred 'core' measures ticked higher
• Year-over-year price growth excluding food & energy prices held steady at 1.5%.

Our Take:

There were further tentative signs in August that the puzzling recent underperformance of Canadian inflation measures is gradually coming to an end. To be sure, most of a pop higher in the year-over-year headline inflation rate to 1.4% in August was the result of higher gasoline prices - and the rate itself is still well-below the Bank of Canada's 2% inflation target. The year-over-year rate excluding food & energy products held steady at 1.5% after posting its first increase in six months in July but two of the Bank of Canada's preferred 'core' inflation measures-the CPI-trim and CPI-common - ticked up slightly with the third - the CPI-median - holding steady at a stronger 1.7%. Perhaps more telling, the underperformance in those core measures on a year-over-year basis seems to have been concentrated earlier in this year. Our calculations suggest the month-over-month increases in the CPI-trim and CPI-median rates, for example, have both averaged over a 2% annualized rate over the last three months. That is the first time that has happened since June 2016.

It remains difficult to argue that the underperformance of core measures of inflation over the last year in Canada is related to a lack of consumer demand given strong household spending and what look like relatively tight labour markets. That suggests other likely transitory, but frustratingly difficult-to-identify, factors have been at play. Today's report provides tentative evidence this underperformance is easing, consistent with our view that price growth closer to the Bank of Canada's 2% target will gradually reassert itself. We expect that will allow the Bank to continue to hike rates at a gradual pace to lean against strong economic growth, even if current inflation pressures aren't yet forcing policymakers' hands.

Highlights:

• Nominal retail sales rose 0.4% in July, but removing the impact of prices, the volume of sales edged down by 0.2%.
• Higher auto sales and stronger spending at food retailers led the nominal increase.
• E-commerce sales (not all of which are included in the retail sales totals) were up 47% year-over-year in July though their share of retail trade is just 2.3%.

Our Take:

Today's lukewarm retail sales report showed a modest, price-driven increase in retail sales with volumes edging slightly lower. The pause in July is hardly concerning given the robust gains in recent months that drove year-over-year volumes growth to a decade-high in June. Strength in the retail sector is consistent with impressive job gains over the last year, although an uptick in consumer credit which is now growing at its fastest pace since 2011 was also a factor. Canada's recent pace of consumer spending growth—annualized gains of nearly 5% over the first half of this year—looks unsustainable, and with GDP growth now better balanced by other areas like business investment, we think further gradual removal of monetary policy accommodation is in order. We expect the Bank of Canada will raise interest rates once more by the end of the year following consecutive moves in July and September.

Today's retail sales report follows yesterday's solid increase in wholesale trade and a more mixed set of manufacturing data on Monday that showed a narrowly-based decline in shipment volumes. On balance, we think this week's data point to a more modest 0.1% increase in July GDP following solid gains of 0.3% and 0.6% in the prior two months. Even with a slower start to the quarter, we continue to look for an above-trend 2.5% annualized increase in Q3 GDP.

Daily Pivots: (S1) 112.17; (P) 112.44; (R1) 112.75; More...

Intraday bias in USD/JPY remains neutral at this point. Further rally is in favor as long as 111.07 support holds. Sustained break of medium term channel resistance (now at 113.03) will argue that whole correction from 118.65 has completed too. In that case, further rise should be seen to 114.49 resistance for confirmation. However, break of 111.07 minor support will raise the risk of rejection from channel resistance and turn bias back to the downside for 55 day EMA (now at 110.58).

In the bigger picture, rise from 98.97 (2016 low) is seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Daily Pivots: (S1) 0.9617; (P) 0.9667; (R1) 0.9747; More....

Intraday bias in USD/CHF remains neutral for the moment. On the upside decisive break of 0.9772 resistance will suggest that whole down trend form 1.0342 has completed. In that case, near term outlook will be turned bullish for 0.9860/1.0099 resistance zone. Nonetheless, with 0.9772 resistance intact, outlook remains bearish. Below 0.9587 minor support will turn bias back to the downside for 0.9420 low.

In the bigger picture, current development suggests that 0.9443 key support (2016 low) could be taken out firmly as down trend form 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

Daily Pivots: (S1) 1.3505; (P) 1.3546; (R1) 1.3621; More....

Intraday bias in GBP/USD remains neutral as consolidation from 1.3651 continues. In case of deeper fall, downside should be contained by 38.2% retracement of 1.2773 to 1.3651 at 1.3316 and bring rise resumption. Above 1.3651 will turn bias back to the upside for 1.3835 support turned resistance next. Break there will target 55 month EMA (now at 1.4405).

In the bigger picture, the strong break of 1.3444 key resistance now argues that the long term trend in GBP/USD has reversed. That is a key bottom was formed back in 1.1946 on bullish convergence condition in monthly MACD. Current rise from 1.1946 will target 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466 next. In any case, medium term outlook will now stay bullish as long as 1.2773 support holds.

Retail sales in Canada rose in July, up 0.4% month-on-month, although slight downward revisions to the June figures broke what would have been a five month streak of increased spending. July's gains were entirely due to price increases however, as volumes declined 0.2%.

The two largest spending categories, motor vehicle and parts dealers (+0.8%) and food and beverage stores (+0.9%) saw solid increases in July. Offsetting these somewhat were declines in the furniture and home furnishings (-0.6%), electronics and appliances (-0.2%), and building material and garden equipment (-0.2%) categories. Sales elsewhere were generally up. Excluding car/parts dealers and gasoline sales, retail sales growth was a tick lower, at 0.3%.

Across the provinces, it was Quebec that drove the result, as sales rose 1.0% in July. Saskatchewan (+1.3%) and British Columbia (+0.7%) also saw decent sales growth, with the latter recording a 5th straight month of gains. Sales growth across the remaining provinces was mixed.

Key Implications

Canadians seem to have celebrated Canada Day by heading to a car dealership as new vehicle sales helped drive a respectable climb in retail sales in July. While the volume of goods sold was down a tick, the broader data evolution remains consistent with a healthy pace of GDP growth over the back half of the year.

Indeed, as discussed in our latest Quarterly Economic Forecast, consumer spending is likely to moderate from the hot pace seen at the start of the year. But, it is expected to remain an important driver of growth, supported by rising aggregate incomes generated by a healthy labour market.

With the July data likely to only partially reflect the impact of tighter monetary policy, today's data will likely be discounted somewhat as the Bank of Canada assesses the impacts of its actions. That said, with robust July wholesale trade figures released yesterday, and a modest uptick in inflation also reported this morning, the data continues to support further monetary tightening in the final quarter of the year.

Daily Pivots: (S1) 1.1886; (P) 1.1919 (R1) 1.1974; More...

EUR/USD is bounded in range of 1.1822/2091 so far and intraday bias stays neutral. Considering bearish divergence condition in 4 hour and daily MACD, break of 1.1822 should confirm near term reversal. In the case, intraday bias will be turned back to the downside through 1.1661 support. EUR/USD should then correct whole rise from 1.0569 and target 38.2% retracement of 1.0569 to 1.2091 at 1.1510. However, rebound from 1.1822/1837 and break of 1.2029 will resume the larger up trend to next key fibonacci level at 1.2516.

In the bigger picture, rise from medium term bottom at 1.0339 is still in progress for 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall fro 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside. But after all, break of 1.1661 is needed to indicate medium term topping. Otherwise, outlook will remain bullish in case of pull back.

Yen trades broadly higher today on resurgence of geopolitical risks. North Korea threatens to launch hydrogen bomb in Pacific Ocean, in response to US President Donald Trump's "total destruction" provocation, and new sanctions. But overall, Yen is the weakest one for the week so far with risk appetite and global monetary stimulus exit in the background. This is also reflected in Swiss Franc, which is the second weakest for the week. On the other hand, Euro reversed the post FOMC selloff and is occupying the top spot among major currencies. The common currency is also getting support from solid data. Dollar is firm too but the uncertainty over the tension with North Korea is limiting its strength.

Eurozone PMIs indicates broad-based upswing

PMI data from Eurozone are generally better than market expectation. Eurozone PMI manufacturing rose to 58.2 in September, up from 57.4 and beat expectation of 57.2. Eurozone PMI services rose to 55.6, up from 54.7 and above expectation of 54.8. Germany PMI manufacturing rose to 60.6 in September, up from 59.3, and beat expectation of 59.0. Germany PMI services rose to 55.6, up from 53.5, beat expectation of 53.8. France PMI manufacturing rose to 56.0, up from 55.8, beat expectation of 55.5. France PMI services rose to 57.1, up from 54.9, beat expectation of 54.8. IHS Markit chief business economist Chris Williamson noted that "it was a super manufacturing performance. We are well-placed for a strong fourth quarter as well ... in this broad-based upswing."

Japan PM Abe to announce snap election next Monday

In Japan, rumors continue to heat up, on Prime Minister Shinzo Abe to dissolve the parliament this month and call for a snap election on October 22. Abe would be holding a news conference on Monday afternoon Japan time to announce it. It's reported that Abe would also make use the opportunity to delay the timing to achieve primary budget surplus, for a few years from fiscal 2020. IMF mission chief for Japan said that BOJ will likely lag behind Fed and ECB in normalization of monetary policy. But he noted that "his is appropriate, as monetary policy is focused on domestic conditions and domestic conditions are different among countries and regions." And, a gradual increase in sales tax, together with control social security spending would help the government to achieve medium term fiscal reform.

Loonie softer after mixed data

Canadian Dollar trades softer after mixed data. Headline CPI rose 0.1% mom, 1.4% yoy in August, below expectation of 0.2% mom, 1.5% yoy. But that was an uptick from July's 0.0% mom, 1.2% yoy. CPI core common rose to 1.5% yoy, CPI core trim rose to 1.4% yoy, CPI core mean was unchanged at 1.7% yoy. Retail sales rose 0.4% mom in July, above expectation of 0.3% mom. But ex-auto sales rose 0.2%, well below expectation of 0.4% mom.

In the weekend - New Zealand and Germany elections

The upcoming New Zealand election would be a tight race between the incumbent National Party and Labor Party. Opinion polls suggest that supports for both parties are at around 40%. As such none of them would be able to a form government without entering coalition with smaller parties. This is such uncertainty that has increased the volatility of New Zealand dollar of late. Maintaining the status quo – a minority government led by Nationals- would be the most NZD-favorable while a Labor + Green+ NZ First trio would lead to an immediate, but short-term selloff in the currency. More in New Zealand Election: Change in Government is NZD-Negative in Near-Term

Although Chancellor Angela Merkel's Christian Democratic Union (CDU) and its sister party, the Christian Socialist Union (CSU), have been comfortably leading in polls. There still are a number of uncertainties in the upcoming German election. While Merkel is on the way to be the Chancellor for a fourth, and the last, term, her party is unlikely to form a government without forming coalition with other party(ies). While the Grand Coalition (CDU/CSU+SPD as the junior partner), just like the one we have had since 2013 and between 2005-2009, is the most favorable to the economy and the financial markets, it cannot be seen as a done deal. Meanwhile, rising supports for the populist Alternative for Germany (AfD) signal that a far-right party would enter the parliament for the first time since WWII. AfD has pledged to promote its anti-EU and anti-immigrants rhetoric in the parliament as it might probably become the biggest opposition party in case of a Grand Coalition. Moreover, the parliament is prone to be more fragmented with six parties in 2017-term, compared with four previously. More in German Election: Not as Boring as You Think

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1886; (P) 1.1919 (R1) 1.1974; More...

EUR/USD is bounded in range of 1.1822/2091 so far and intraday bias stays neutral. Considering bearish divergence condition in 4 hour and daily MACD, break of 1.1822 should confirm near term reversal. In the case, intraday bias will be turned back to the downside through 1.1661 support. EUR/USD should then correct whole rise from 1.0569 and target 38.2% retracement of 1.0569 to 1.2091 at 1.1510. However, rebound from 1.1822/1837 and break of 1.2029 will resume the larger up trend to next key fibonacci level at 1.2516.

In the bigger picture, rise from medium term bottom at 1.0339 is still in progress for 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall fro 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside. But after all, break of 1.1661 is needed to indicate medium term topping. Otherwise, outlook will remain bullish in case of pull back.

Economic Indicators Update

USD/CHF - 0.9693

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

The greenback retreated after rising to 0.9748 earlier this week and consolidation below this level would be seen and pullback towards the lower Kumo (now at 0.9654) cannot be ruled out, however, reckon previous minor resistance at 0.9630 would limit downside and price should stay well above indicated support at 0.9589, bring rebound later.

On the upside, whilst recovery to the Kijun-Sen (now at 0.9708) cannot be ruled out, reckon upside would be limited to 0.9720-25 and said resistance at 0.9748 should hold, bring retreat later. In the event dollar is able to penetrate said resistance at 0.9748, this would revive bullishness and extend recent rise from 0.9421 low to 0.9761-66 (50% Fibonacci retracement of 1.0100-0.9421 and previous resistance), then another previous resistance at 0.9773. As near term outlook is still mixed, would be prudent to stand aside for now.

GBP/USD - 1.3572

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Although cable retreated after edging higher to 1.3596 and consolidation with mild downside bias is seen for weakness towards the Kijun-Sen (now at 1.3534), below 1.3500 is needed to revive near term bearishness and signal the rebound from 1.3452 has ended, bring further fall to 1.3470, then test of said support. Looking ahead, only a drop below 1.3452 would add credence to our view that top has been formed at 1.3658 earlier this week, bring retracement of recent rise to 1.3400-05 (50% Fibonacci retracement of 1.3153-1.3658).

On the upside, above 1.3600 would extend gain to 1.3620-25, however, still reckon said this week’s high at 1.3658 would hold from here, bring retreat later. Only a break above said resistance at 1.3658 would signal recent upmove has resumed and extend gain to 1.3690-00 later. As near term outlook is still mixed, would be prudent to stand aside for now.