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The Canadian dollar is showing limited movement on Tuesday. In the North American session, USD/CAD is trading at 1.3687, up 0.03% on the day at the time of writing.

Canada’s CPI lower than expected

Canada followed the US and posted a better-than-expected inflation report for June. The annual inflation rate fell to 2.7% in June, down from 2.9% in May and below the market estimate of 2.9%. This matched the three-year low in April. Gasoline prices fell sharply while food prices rose. Monthly, CPI declined in June by 0.1%, down from 0% in May and below the market estimate of 0.1%. This was the first decline since December 2023. Interestingly, the US also posted a 0.1% decline in the June CPI report.

Core inflation, which didn’t benefit from the sharp decrease in energy prices, ticked higher to 1.9% y/y, up from 1.8% in May and above the forecast of 1.6%. Monthly, core inflation declined by 0.1%, sharply lower than the 0.6% gain a month earlier and below the forecast of 0.4%.

The Bank of Canada will be pleased with the inflation report, as headline inflation declined and core inflation remains below the 2% target. The central bank meets on July 24 and the markets have raised the odds of a rate cut at that meeting to 88%, up from 82% before the inflation release. Canada releases retail sales on Friday, the last critical data prior to the rate decision.

US retail sales softer than expected

US retail sales dipped to 2.3% y/y in June, down from 2.6% in May but higher than the forecast of 2.1%. Monthly, retail sales were unchanged in June, down from a revised 0.3% in May and matching the market estimate. This was the second time in three months that retail sales were unchanged, pointing to weakness in consumer spending.

USD/CAD Technical

• USD/CAD tested resistance at 1.3704 earlier. Above, there is resistance at 1.3726
• There is support at 1.3668 and 1.3646

Markets

Global core bonds gained some ground going into today’s main dish, US retail sales. UK gilts slightly outperformed Bunds and Treasuries as markets gear for tomorrow’s June CPI numbers. A further easing on all accounts is expected but the sub 2% drop in the headline reading, if it were to materialize, will probably grab most of the headlines as paving the way for a first Bank of England cut in August. Money markets give it a 50% probability currently and have a total of 50 bps cut priced in for all of 2024. Front end yields slipped the most (up to 7 bps) with the UK 2-yr yield testing the 4% reference for the first time this year. German and US yields eased between 5 and 6.5 bps across the curve with the latter undoing part of yesterday’s “Trump steepening”. Focus in Europe went to the ECB’s quarterly lending survey (down below). Currency markets barely budged.

Enter retail sales. June turnover after an upwardly revised May came on the much stronger side of expectations with the headline number being flat compared to the estimated 0.3% m/m decline. Core gauges ranged from +0.4% for the series excluding autos (vs +0.1% expected) to +0.9% for the control group (ex. food, gas, building materials and car dealers, +0.2% expected). The latter is used in the calculation of private consumption for GDP. Sales rose in most categories but two components acted as a strong drag. Motor vehicles & parts tanked 2% m/m while gasoline stations’ sales dropped no less than 3%. Today’s data snaps a streak of below-consensus outcomes that included US ISM’s, payrolls and CPI. But even as the front of the US curve erased all previous gains, money market expectations for the Fed changed little. Yields at longer maturities pared losses to 4 bps. The dollar in printing its biggest intraday move strengthened against the euro to EUR/USD 1.0874. USD/JPY edged towards 158.73 and cable (GBP/USD) eased further from the highest level in a year around 1.30.

In news after the US retail sales, the IMF in an update to its World Economic Outlook raised 2024 growth forecasts for China (5%), India (7%) and marginally for the euro area (0.9%) while slightly adjusting the US (2.6%) downwards. Projections for most major economies in 2025 were left unchanged with China (+0.4 ppt to 4.5%) being a noticeable exception. The IMF also issued a warning on inflation. It said that stubborn wage-driven service prices are hampering the disinflation process, creating upside risks and the prospect of “higher-for-even-longer interest rates”. New forecasts show global inflation is unlikely to return to 2% until the end of next year.

News & Views

The ECB quarterly bank lending survey (BLS) showed a very small further tightening of credit standards for loans or credit lines to corporates in Q2 (net percentage of banks of 3%). Banks’ risk tolerance was the main driver. They expect a further moderate tightening in Q3 2024 (5%). Firms’ net demand for loans declined further (-7%), although by substantially less than in Q1 (-28%). Banks expect a first net increase in demand for loans since Q3 2022 in the next quarter. Credit standards for loans to households for house purchases showed a moderate further net easing (-6%; mainly because of competition) while those for consumer credit pointed to a moderate further net tightening (+6%; driven by risk perceptions). Banks expect credit standards to remain broadly unchanged in both loan categories in Q3 2024. Net demand for both housing loans and consumer credit increased for the first time since 2022 (respectively +16%, improving housing market prospects & +13%, spending on durables and consumer confidence). A further improvement is expected for Q3, especially for housing loans.

Canadian headline inflation fell by 0.1% on a monthly basis in June, coming off a 0.6% M/M increase in May and beating +0.1% M/M consensus. Main downward contributors were travel tours, gasoline, clothing and passenger vehicle prices. Core inflation (ex food and energy) was flat on the month. CPI rose 2.7% Y/Y, down from 2.9% in May, matching the slowest pace since March 2021, largely the result of a slower rise in gasoline prices. Lower prices for durable goods (-1.8% Y/Y) also contributed. The Bank of Canada’s preferred core gauges (median & trimmed mean) respectively slowed from 2.7% Y/Y to 2.6% and stabilized at 2.9% Y/Y. Canadian sovereign bond yields follow today’s global move down with the belly of the curve outperforming (-5 bps). The Loonie loses out against a stronger dollar with USD/CAD reclaiming 1.37. Today’s inflation print and yesterday’s BoC business outlook suggest that the Bank of Canada could cut its policy rate a second time at next week’s policy meeting.

Graphs

USD/CAD tests 1.37 big figure after CPI miss paves the way for a second BoC rate cut next week

UK 2-yr yield flirts with 4% barrier for the first time this year going into tomorrow’s (<2%?!) CPI release

Nasdaq nicely developing within the upward trend. Last week Thursday’s slip-up all but erased

EUR/USD: failed test of 1.09 yesterday meets with follow-through return action in wake of consensus-topping retail sales

NZDUSD is coming out of consolidation, suggesting that the price action since the start of July was a triangle in wave B. Therefore, the whole retracement from June 12th is much more complex and deeper but still has a corrective shape. It looks like we are just breaking down into wave C, which has key support levels at 0.6020, with the second at 0.5980 area, which can be a very important swing zone going into the inflation report from New Zealand later today. Not only Elliott Wave structure, but also H&S pattern shows potential bullish formation, if we see support soon for right shoulder.

Headline CPI inflation decelerated in June to 2.7% year-on-year (y/y), right on consensus expectations and below last month's 2.9% y/y print.

The deceleration was led by gasoline prices, which dropped 3.1% month-on-month (m/m), compared to the +5.6% m/m gain last month. This follows OPEC+'s announcement of the phase out of prior production cuts.

Lower prices for durable goods (-1.8% y/y) also lent a hand, driven by price declines for passenger vehicles (-0.4% y/y). The Statcan note called out the "reduction in prices for used vehicles (-4.5%) amid improved inventory levels compared with a year ago."

However, services inflation edged higher to 4.8% y/y (from 4.6% y/y in May). This was driven by still high shelter inflation (+6.2% y/y), which has been led by an 8.8% y/y increase in rent and a 22.3% y/y increase in mortgage interest costs.

The average of the Bank of Canada's preferred "core" inflation measures held steady at 2.8% y/y in June. On a three-month annualized basis, the average moved to 2.9% in June from 2.5% in May.

Key Implications

Today's CPI report was a bit of a mixed bag. While headline inflation got back on track in June, the three-month annualized pace of core inflation has now been rising for three straight months. This infers that the annual pace of inflation should remain in the upper end of the BoC's 1% to 3% range over the coming months. This has been propelled, not just by shelter prices, but also by price gains in "nice-to-haves" like the cost of dining out, health spending, and household operations.

The BoC is set to make a rate announcement next week and today's report has increased odds of back-to-back rate cuts. Recent data have supported a cut, with the job market loosening and wage gains decelerating from elevated levels. From our view, the story hasn't changed. The BoC is in a cutting cycle. Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next.

Retail sales was virtually unchanged month-over-month in June. Despite this, the reading was still higher than the consensus forecast calling for a decrease of -0.3%. Additionally, May's figure was revised upwards to a 0.3% monthly gain (previously 0.1%).

Trade in the auto sector was down -2.0% m/m, as the increase at automotive parts and accessory stores (1.0%) was wholly offset by the decline at motor vehicle dealers (-2.3%).

Sales at gasoline stations fell a sizeable -3.0% m/m, extending last month's -2.1% m/m decline and reflects the continued pullback in gas prices. The building materials and equipment category rose by 1.4% m/m.

Sales in the retail sales "control group", which excludes the volatile components above (autos, building materials and gas) and is used to estimate personal consumption expenditures (PCE), rose 0.9% on the month after rising by 0.4% m/m in May.

Among the control group, the largest positive contributions came from non-store retailers (1.9%% m/m), health and personal care stores (0.9%) and clothing and accessory stores (0.6% m/m).

The only control-group category to decline was sporting goods and hobby stores (-0.1% m/m).

Food services & drinking places – the only services category in the retail sales report –rose 0.3%. May's data was also revised to growth of 0.4% (reported as a -0.4% m/m decline previously).

Key Implications

Retail sales have had a rather tepid showing for much of the second quarter and today's outturn added to the lackluster performance. The data adds to the growing evidence that households aren't quite as impervious to higher interest rates and prices as earlier spending might have suggested. With recent data showing that labor market conditions continue to cool, prospects for a rebound are limited. All said, retail sales did stage a modest rebound in the second quarter, up 2.2% q/q (annualized) from a -0.8% (annualized) decline last quarter.

And the consistent data continues to roll in. Fed members have stressed data dependence in their quest to bring inflation to heel without triggering an economic slump. Today's report showing waning consumer spending adds to the recent employment and inflation numbers in that train of data. In Fed Chair Powell’s first remarks since the inflation report, he noted that the central bank will not wait for inflation to hit 2% before cutting rates. While he might not have been intending to make any signals about when the Fed might start to cut rates, market players have nonetheless parsed his words for any hints of when one might be forthcoming. So far, bets are rising for a September cut.

Dollar bounces higher in early US session, buoyed by stronger-than-expected retail sales data. This resilience in consumer spending comes despite the persistent high inflation and elevated interest rates. The robust retail sales figures lend support to Fed's soft landing scenario, where the economy slows down without falling into a recession. However, there are concerns that such strong consumer demand might impede the ongoing disinflation process, which is crucial for Fed to consider lowering interest rates in the future.

Conversely, Loonie, is facing some pressure following weaker-than-expected inflation data, especially in core measures. Despite this, Loonie is holding up relatively well against most other currencies. The markets are likely to take some time to fully digest the implications of the latest inflation readings and their impact on BoC's rate decision next week.

Currently, Dollar stands as the strongest performer of the day, followed by Euro and Loonie. Aussie is the worst performer, lagging even behind Yen, with Kiwi trailing closely. Sterling and Swiss franc are positioned in the middle of the performance spectrum.

Technically, Gold is on the verge of making new record high. Decisive break of 2449.83 will resume larger up trend. Next target is 161.8% projection of 1614.60 to 2062.95 from 1810.26 at 2535.96. However, break of 2392.78 support will indicate rejection by 2449.83 and extend the medium term consolidation pattern with another fall.

In Europe, at the time of writing, FTSE is down -0.56%. DAX is down -0.51%. CAC is down -0.77%. UK 10-year yield is down -0.0289 at 4.075. Germany 10-year yield is down -0.034 at 2.442. Earlier in Asia, Nikkei rose 0.20%. Hong Kong HSI fell -1.60%. China Shanghai SSE rose 0.08%. Singapore Strait Times fell -0.34%. Japan 10-year JGB yield fell -0.0259 to 1.024.

Canada CPI slows to 2.7% yoy in June, down-0.1% mom

Canada's CPI slowed from 2.9% yoy to 2.7% yoy in May. The deceleration was largely the result of slower year-over-year growth in gasoline prices, which rose 0.4% in June following a 5.6% increase in May. Excluding gasoline, the CPI rose 2.8% yoy.

Looking at the core measures, CPI median fell from 2.7% yoy to 2.6% yoy. CPI trimmed was unchanged at 2.9% yoy. CPI common slowed from 2.4% yoy to 2.3% yoy.

On a monthly basis, CPI fell -0.1% mom in June, following a 0.6% mom increase in May. The monthly decrease was driven by lower prices for travel tours (-11.1%) and gasoline (-3.1%).

US retail sales steady in Jun, ex-auto sales up 0.4% mom

US retail sales was steady mom at USD 704.3B in June, above expectation of -0.20% mom. Ex-auto sales rose 0.4% mom to USD 573.6B, above expectation of 0.1% mom. Ex-gasoline sales rose 0.2% mom to USD 652.4B. Ex-auto and gasoline sales rose 0.8% mom to USD 507.1B.

Total sales for the April through June period were up 2.5% from the same period a year ago.

German ZEW falls to 41.8, first decline in a year

Germany ZEW Economic Sentiment fell from 47.5 to 41.8 in July, below expectation of 44.3. That's also the first decline in a year since July 2023. Current Situation Index rose from -73.8 to -68.9, above expectation of -73.0.

Eurozone ZEW Economic Sentiment fell from 51.3 to 43.7, below expectation of 50.2. Current Situation Index rose 2.5 pt to -36.1.

"The economic outlook is worsening. For the first time in a year, economic expectations for Germany are falling. The fact that German exports decreased more than expected in May, the political uncertainty in France and the lack of clarity regarding the future monetary policy by the ECB have contributed to this development," comments ZEW President Professor Achim Wambach.

Eurozone goods exports fall -0.5% yoy in May, imports down -6.4% yoy

Eurozone goods exports fell -0.5% yoy to EUR 241.5B in May. Goods imports fell -6.4% yoy to EUR 227.6B. Trade balance showed a EUR 13.9B surplus. Intra-Eurozone trade fell -5.6% yoy to EUR 216.0B.

In seasonally adjusted term, goods exports fell -2.6% mom to EUR 237.4B. Goods imports fell -0.1% mom to EUR 225.1B. Trade balance recorded EUR 12.3B surplus, smaller than expectation of EUR 20.3B. Intra-Eurozone trade fell -2.8% mom to EUR 210.4B.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0877; (P) 1.0900; (R1) 1.0916; More....

EUR/USD's retreat from 1.0921 extends lower today but stays well above 1.0805 support so far. Intraday bias remains neutral first. Some more consolidations would be seen but further rally is in favor. Firm break of 1.0915/21 will will resume whole rise from 1.0601 to 100% projection of 1.0601 to 1.0915 from 1.0665 at 1.0979. However, break of 1.0805 will turn bias back to the downside for deeper pullback.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern, possibly a triangle, that's still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). This will now remain the favored case as long as 1.0601 support holds.

Economic Indicators Update

Daily Pivots: (S1) 157.32; (P) 157.88; (R1) 158.57; More...

Intraday bias in USD/JPY remains neutral for consolidations above 157.61. On the downside, break of 157.16 and sustained trading below 55 D EMA (now at 157.72) will bring deeper correction to 38.2% retracement of 140.25 to 161.94 at 163.65. But strong support should be seen there to bring rebound. Meanwhile, break of 159.44 minor resistance will turn bias back to the upside for stronger rebound towards 161.94 high.

In the bigger picture, as long as 151.89 resistance turned support holds, long term up trend could still continue through 161.94 at a later stage. Next target will depend on the depth of the current correction from 161.94. However, sustained break of 151.89 will argue that larger scale correction or trend reversal is underway.

Daily Pivots: (S1) 0.8937; (P) 0.8955; (R1) 0.8975; More…

Intraday bias in USD/CHF stays neutral first. Another fall is mildly in favor with 0.9000 resistance intact. Below 0.8914 will bring retest of 0.8825 low. However, break of 0.9000 will turn bias back to the upside for 0.9049 resistance instead.

In the bigger picture, with 0.9243 resistance intact, medium term outlook in USD/CHF is neutral at best. For now, more sideway trading is likely between 0.8332/9243. However, firm break of 0.9243 will indicate larger bullish trend reversal.

Daily Pivots: (S1) 1.2955; (P) 1.2975; (R1) 1.2988; More...

Intraday bias in GBP/USD remains neutral for consolidations below 1.2994 temporary top. But further rally is expected as long as 1.2859 resistance turned support holds. Above 1.2994 will resume the rally from 1.2298 and target 100% projection of 1.2298 to 1.2859 from 1.2612 at 1.3173, which is slightly above 1.3141 key medium term resistance. However, break of 1.2859 will turn bias to the downside for deeper pullback.

In the bigger picture, corrective pattern from 1.3141 medium term top (2023 high) could have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 from 1.2298 at 1.4022.

Daily Pivots: (S1) 1.0877; (P) 1.0900; (R1) 1.0916; More....

EUR/USD's retreat from 1.0921 extends lower today but stays well above 1.0805 support so far. Intraday bias remains neutral first. Some more consolidations would be seen but further rally is in favor. Firm break of 1.0915/21 will will resume whole rise from 1.0601 to 100% projection of 1.0601 to 1.0915 from 1.0665 at 1.0979. However, break of 1.0805 will turn bias back to the downside for deeper pullback.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern, possibly a triangle, that's still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). This will now remain the favored case as long as 1.0601 support holds.