### Canada’s Inflation Rise in September In September, Canada saw an unexpected rise in inflation. The Consumer Price Index (CPI) increased by 2.4% compared to last year, up from 1.9% in August, as reported by Statistics Canada. The monthly increase was 0.1%, which was slightly above what the market expected. The Bank of Canada’s core CPI, which leaves out items like food and energy that can change quickly, grew by 2.8% over the past year and by 0.2% from the previous month. Other indicators included the Common CPI at 2.7%, the Trimmed CPI at 3.1%, and the Median CPI at 3.2%, all showing ongoing price pressures. Gasoline prices only dipped by 4.1% in September, compared to a larger drop of 12.7% in August, which contributed to the overall inflation rise. Without gasoline, the CPI still went up by 2.6% in September, compared to 2.4% in August. After the inflation data was released, the Canadian Dollar gained strength, moving USD/CAD closer to 1.4000. It showed its strongest performance against the Japanese Yen, with mixed results against other currencies. More inflation data from Statistics Canada will be crucial for the Bank of Canada’s upcoming rate decisions as they assess the economy. ### Bank of Canada’s Rate Decision Outlook This surprising rise in inflation creates a challenging situation for the Bank of Canada’s meeting on October 29. We initially anticipated a possible rate cut of 25 basis points, but this strong data makes it more likely that the Bank will pause or take a more cautious approach. We must reconsider any trades that expected a weaker Canadian dollar. The derivatives market, which tracks interest rate expectations, will likely see immediate adjustments. CORRA futures might sell off as the chances of a rate cut decrease, reflecting a change from the easing we’ve experienced since rates peaked above 5% in 2024. This inflation data isn’t isolated, as we observed similar trends in core prices last year, making the Bank’s job more difficult. For currency options on USD/CAD, we can expect increased implied volatility ahead of next week’s central bank meeting. This situation suggests that buying options, like straddles, could be a smart strategy to handle potential significant price movements without having to choose a specific direction. The market appears torn between the Bank’s previous dovish stance and the new firm inflation data. Overall, the case for a stronger Canadian dollar is growing. In addition to this inflation report, oil prices remain strong, with WTI crude staying above $85 a barrel, and recent labor market data show unemployment staying below 6.0%. These factors support the currency, indicating that selling USD/CAD call options or buying CAD futures could be advantageous. Looking at the USD/CAD spot rate, the 1.4000 level is a crucial psychological barrier. A clear drop below the 200-day moving average near 1.3960 could lead to further downward momentum. We should think about using put options to protect any current long USD/CAD positions from a surprising hawkish move by the Bank of Canada. Create your live VT Markets account and start trading now.

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