Just a short back and forth in CAD – Commerzbank

What’s interesting about Canada’s current inflation numbers is that they could provide an indication of how much the Bank of Canada (BoC) might cut rates. That further cuts are likely was clear from the BoC’s statement at the last meeting. After all, in his opening remarks at the last meeting, central bank governor Tiff Macklem said further rate cuts can be expected as long as inflation continues to ease as expected, notes Antje Praefcke, FX analyst at Commerzbank.

Movements in CAD are probably limited

“As a reminder, the BoC has cut rates by 25 basis points at each of the last three meetings, leaving the key rate at 4.25%. We see a good chance the BoC will cut another 25bps at each of the last two remaining rate meetings this year, leaving the key rate at 3.75% at the end of the year. The market is even more aggressive in its expectations and sees a chance for the BoC to go even further.”

“In addition to the central bank governor’s comments, this may be due to the fact that the labor market report for August, which was released after the last BoC meeting, was quite weak: the unemployment rate rose further to 6.6% . At the same time, the ISM index for manufacturing fell below 50 in August, which could mean weaker growth for the second half of the year if the downward trend continues.”

“Inflation is likely to have continued to decline in August, maintaining the picture of further easing in key rates in Canada. If key and core rates fall less than expected, the market could price in some of the current rate cut expectations and the CAD could appreciate somewhat in the near term. If the numbers surprise negatively, the market may feel vindicated in its opinion. However, movements in CAD are likely to be limited, except for a possible short back and forth immediately after the digits.”