CAD Inflation Focus: Market Expectations for July Decision

CAD: Inflation numbers in focus

Markets are split around whether the Bank of Canada will follow up with another rate hike in July after resuming tightening in June. The CAD OIS curves is currently pricing in 15bp for the 12 July meeting, while fully factoring in a hike by September.

Today’s inflation data in Canada will be key to driving market expectations for the July decision. Consensus is looking for a rather substantial slowdown in headline inflation from 4.4% to 3.4%, while the core measure should decelerate to around 4.0%. We are still inclined to think that the BoC will go for another hike in July, and it may take a sub-consensus read in underlying inflation today to convince them not to.

Either way, with the Fed still threatening to tighten more, it seems hard to fully price out BoC tightening down the road, and CAD – which has the best volatility-adjusted carry in G10 – may not fall out of markets’ favours just yet. We still target sub-1.30 levels in the third quarter.