(Kitco News) Gold priced in Canadian dollars now has an even bigger obstacle to overcome next week as analysts start to price in another 75 basis point rate hike from the Bank of Canada due to problematic core inflation that is not cooling down.
Gold in Canadian dollars is doing slightly better than gold in U.S. dollars. During the last 30 days, gold in CAD is up 1%, while gold in USD is down 2.8%.
This week's highly anticipated macro number has been September's inflation data. But it offered a mix of good and bad news.
Annual inflation showed signs of cooling in September, coming in at 6.9%, down from August's 7%, and marking the third monthly deceleration. However, excluding food and energy prices — a measure more important to the Bank of Canada — prices rose 5.4% from 5.3% in August.
While gasoline prices have been decelerating, food prices saw one of the most significant increases — up 11.4%, the fastest price acceleration since 1981.
In light of this, analysts believe Canada's central bank will be disappointed with this report. To get inflation under control, the Bank of Canada was one of the first central banks to tighten policy this year, hiking rates by a total of 300 basis points. The biggest one-time increase happened in July when the Bank raised rates by 100 basis points.
All eyes are on next week's monetary policy meeting, and market expectations are starting to climb from 50 bps to 75 bps come October 26.
"There will be some long faces at the Bank of Canada this morning as inflation cooled less than expected," said CIBC economist Karyne Charbonneau. "The Bank of Canada … is paying closer attention to core inflation. CPI excluding food and energy rose … at a pace that's too high to be consistent with the 2% target. The Bank of Canada therefore still has work to do, and should be set for another 75 bps increase in the overnight rate next week."
The September inflation number will mean that the Bank of Canada has "not slayed the inflation dragon yet," Charbonneau added. CIBC is also looking for an additional 25 bps increase at the December meeting.
So far, Canada's central bank has been on par with the Federal Reserve's rate hike cycle and sometimes even slightly ahead. With the upcoming October meeting, Canada's key rate will rise higher than that of the Fed, which is currently between 3%-3.25%. Markets are also expecting another 75 bps hike from the Fed come November.
"Bond yields jumped immediately after the [inflation] release, but have since retraced part of those gains. The Canadian dollar, which had depreciated overnight, appreciated right after the release as investors understand that this CPI report adds some pressure on the Bank of Canada," Charbonneau explained.
Due to the strength of the U.S. dollar against its peers, gold priced in USD has been one of the worst trades within the precious metal this year. In the meantime, other forex combinations have been fairing much better. For example, gold in Australian dollars is up 4.2% in the last 30 days.
Around 90% of people trade gold in U.S. dollars, but if investors want to become more niche, then they need to look into buying gold in the weakest currency and shorting it in the strongest currency, Pepperstone's head of research Chris Weston told Kitco News last week when talking about various gold and forex combinations. "If you get this right, you can max out the currency effect on the back of this," Weston said.
The U.S. dollar remains an over-loved currency, which gives an opportunity to short gold. "If I wanted to trade gold to the upside, then I would look at what we perceive to be the weakest currencies, and that continues to be the Aussie, the Kiwi, and the pound," Weston pointed out.
