CPI will support aggressive betting – ING

Canadian inflation is expected to slow further today. Consensus for August core CPI is 2.1%, essentially at the Bank of Canada’s target midpoint, while all core measures of inflation are seen decelerating by about 0.2% since the start of last year. Remember core inflation is already in the BoC’s 2-3% target range and we think today’s print will do very little to dissuade ongoing dovish bets on BoC easing, notes ING FX strategist Francesco Pesole.

CAD remains less attractive than other high-beta currencies

“If the growing expectations for a 50 basis point Fed cut stem largely from the idea that the FOMC is starting its easing cycle too late, the same cannot be said for the BoC, whose policy rate has already been cut by three times and stands at 5.25%, 125 bps below the Fed funds rate. However, as is often the case, Fed pricing has a huge influence on BoC pricing and markets have recently priced in 75bp worth of cuts in Canada over the next two meetings.”

“The September policy announcement is next week and we suspect the BoC may opt for 25bp even if they cut 50bp tomorrow and Canadian inflation slows as expected today. We cannot rule out this being followed by a 50bp cut at the December meeting, but we continue to favor 25bp steps from the BoC.”

“Consequently, we believe the Canadian dollar may benefit from some repricing in the coming months. USD/CAD has been struggling to make its way consistently below 1.35 and recently bounced back to 1.36 as oil prices fell. Our view remains that Fed easing may eventually help a multi-quarter decline in USD/CAD materialize, but for now some stabilization is more likely as CAD remains less attractive than many other beta currencies raised.”