Canada’s Bank of Canada core Consumer Price Index (CPI), measured month on month, was unchanged at 0.2% in April. This matched the previous month’s reading.
The data indicates that underlying consumer price pressures held steady on a monthly basis. The figure reported for April was 0.2%.
Market Repricing For June
The unchanged 0.2% core inflation reading for April shows that underlying price pressure is proving sticky, making a Bank of Canada rate cut in June less likely. We have seen overnight index swaps react immediately, with the odds of a cut at the next meeting dropping from over 50% last week to less than 20% this morning. This suggests the market is quickly repricing the Bank’s path for the summer.
This persistent inflation arrives alongside signs of a slowing economy, creating a difficult situation for policymakers. For instance, last week’s jobs report showed the Canadian unemployment rate ticked up again to 6.2%, while recent housing starts have also fallen short of expectations. We believe this conflict between stubborn inflation and weakening growth will be the main driver of market uncertainty.
Given this backdrop, we anticipate a rise in implied volatility on Canadian dollar assets and short-term interest rate futures. This environment favors derivative strategies that profit from price swings rather than a specific direction, such as purchasing straddles on June USDCAD options. The market is now looking for more clarity, which it may not get for several more weeks.
Looking back to the 2024-2025 period, we remember how the Bank of Canada held its policy rate steady for an extended time, even as growth forecasts were trimmed, to ensure inflation was truly defeated. That experience suggests the Bank will likely tolerate some economic weakness before cutting rates prematurely. Traders who bet against the Bank’s patience were caught on the wrong side of the market then.
Rates Divergence And Cad Support
Therefore, positions that bet on higher-for-longer Canadian rates relative to the United States could be beneficial. With the U.S. showing more consistent signs of disinflation, the spread between Canadian and U.S. two-year bond yields has already narrowed by 10 basis points this month. We expect this trend may continue, potentially lending support to the Canadian dollar against the greenback.
