CAD: Down But Not Out
Canada CPI fell by 0.1% m/m in July. On a y/y basis, CPI grew only by 1.3% (consensus: 1.5%, UBSe: 1.4%), bringing the average inflation rate over the last three months down to 1.3% y/y, the lowest level since 2009. USDCAD bounced back on Friday, after declining four days consecutively, as investors expected the BoC to soften its hawkish bias at the margin. But as noted in the July Monetary Policy report, the central bank expects inflation “to remain noticeably below” the 2.0% target in 2012 before rising to target in mid-2013. We expect the BoC to tighten policy next year and believe that the soft July CPI will not have a material influence on the central bank’s stance – which should bring the CAD bulls back. Data in the US remained positive on Friday with the University of Michigan consumer sentiment index rising above consensus to 73.6 in early August and the index of leading economic indicators rising by 0.4% (consensus: 0.2%). The current account balance in the Eurozone registered a surplus of EUR15.7 bn in June. On a seasonally adjusted basis, Q2 is indeed the best quarter since 1995. Our economists note that the 12-month current account balance to GDP shows a surplus of 0.5%, suggesting that the Eurozone remains a competitive area, albeit helped by falling oil prices and a weaker EUR. Data releases are limited today but the week gets busier with Eurozone PMIs and RBA minutes due on Tuesday and Fed minutes due on Wednesday. The political scene in the Eurozone also gets active this week with German Chancellor Merkel and French president Hollande meeting on August 23 followed by Greek Prime Minister Samaras meetings with Merkel and Hollande on August 24 and 25 respectively. German lawmakers on Friday suggested that Merkel is considering easing Greece’s bailout terms. Though, we believe this should eventually happen, it is unlikely that the meetings this week will achieve any major breakthrough. Rather, the Eurogroup meetings in September could be a more appropriate forum for developments in this regard.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank