Canada’s Consumer Price Index (CPI) rose 2.8% year on year in April. This was below the expected 3.1%.
The CPI figure is 0.3 percentage points lower than forecast. The data point refers to annual inflation for April in Canada.
The surprise dip in April’s inflation to 2.8% has significantly shifted our view on the Bank of Canada’s path. This reading, well below the expected 3.1%, gives the Bank the justification it needs to consider easing policy sooner than anticipated. All eyes are now on the upcoming June 7th policy meeting, which has become a live event for a potential rate cut.
We should position for lower short-term rates by looking at derivatives tied to the Canadian Overnight Repo Rate Average (CORRA). The overnight index swaps market is now pricing in an 85% probability of a 25 basis point cut in June, up from just 40% before the inflation report was released. Buying calls on three-month CORRA futures is a straightforward way to express this view that the Bank will act.
This dovish repricing makes the Canadian dollar less attractive, especially against the US dollar where the Fed remains more hesitant to cut. Following the data, we’ve already seen the USD/CAD exchange rate break decisively above the 1.3750 level, clearing a key technical resistance. We should consider buying USD/CAD call options with July expiries to capitalize on further Canadian dollar depreciation.
This situation reminds us of the setup we saw back in late 2024, when a string of weak data preceded the Bank’s pivot to easing monetary policy in early 2025. While the direction seems clear, implied volatility on Canadian dollar options has jumped to a three-month high of 8.2%, suggesting the market expects a significant move. This elevated volatility means option premiums are higher, so we must be precise with our entry points.
