Image © Bank of Canada

- CAD weakens after data offers little support to the BoC.

- CPI rises but "underlying inflation" holds steady at target.

- Core retail sales miss for September, as oil falls even further.

The Canadian Dollar weakened in volatile trading Friday as markets digested October's inflation statistics, which appeared to offer little support for the Bank of Canada's (BoC) ambition to raise interest rates at a faster pace in 2019.

Inflation rose at an annualised pace of 2.4% during October, up from 2.2% previously and when markets had looked for the consumer price index to remain unchanged during the recent month.

Canada's three measures of core inflation, which remove volatile items from the goods basket because of the distorting impact they have on underlying trends, all continued to average the 2% target during October.

Transportation and shelter costs rose at the fastest pace of all categories in the 12 months to the end of October, although Statistics Canada also noted a 7% increase in mortgage interest costs that hit households during the period.

"Canadian CPI heated up again in October," says Andrew Grantham, an economist at CIBC Capital Markets. "However, given the recent fall in oil/gasoline prices, headline CPI inflation will cool noticeably next month and the BoC's three core measures were all in line with expectations."

Markets care about the inflation data because it has significant influence over Bank of Canada interest rate decisions, which are the raison d'être for most moves in exchange rates.

Changes in rates are normally only made in response to movements in inflation, which is sensitive to growth, but impact currencies through the push and pull influence they have on capital flows as well as their allure for traders.

The USD/CAD rate was quoted 0.41% higher at 1.3245 following the release after whipsawing for a brief period, while the Pound-to-Canadian-Dollar rate was 0.05% higher at 1.6990 despite losses for Sterling elsewhere.

Separately, Statistics Canada said Friday that retail sales rose by 0.2% during September, but that growth was only 0.1% when large ticket items like cars are excluded from the figures.

The 0.1% growth figure excluding cars, known as core retail sales, took the market by surprise as consensus had been for a 0.3% increases. The disappointment suggests Canada's economy may be growing slower than markets anticipated.

"With the pick-up in CPI likely to prove temporary, and growth still tracking just below 2% for Q3, we see nothing here to tip the BoC's hand towards a December hike. We continue to favour them waiting until Q1 2019, by which time we'll hopefully see some improvement in growth data and global oil prices," Grantham says.

The Bank of Canada raised its interest rate by 25 basis points to 1.75% in October and said it will go on lifting its benchmark rate over coming quarters, potentially taking the cash rate up to 3.5%.

Markets have since been attempting to gauge whether the BoC will raise rates again in December or wait until next year, although the recent fortnight has seem investors and analysts begin to give up hopes of another 2018 hike.

Canadian economic growth over coming months will be an important determinant of when the BoC makes its next move, and of how fast rates rise thereafter. However, the economic outlook has begun to dim of late.

Brent crude oil, the global benchmark, has fallen more than 20% from $80 per barrel in October to below $60 in November and now trades at a -11.5% loss for the 2018 year.

Western Canadian Select has had an even worse time, setting repeated record lows during recent months thanks to both domestic and international developments.

That is unhelpful because the nation's largest export is oil and the economic fortunes of significant parts of some regions are hinged on the outlook for prices.

"A couple of hikes in the first few months of 2019 would see the Canadian dollar appreciate, but we see levels below 1.30 as opportunities to sell the loonie, expecting rate hikes to ultimately come in no higher than current implied pricing, and below the BoC’s latest rhetoric which cited a 2.5-3.5% neutral policy rate range," says Avery Shenfeld, chief economist at CIBC, in an earlier note.

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