Canada’s Consumer Price Index (CPI) rose 2.3% year over year in January. This was below the 2.4% forecast.
This CPI print suggests inflation was a bit lower than expected. No other details were provided.
At 2.3%, inflation gives the Bank of Canada more room to think about cutting interest rates sooner. Markets have quickly adjusted. Overnight swaps now price in almost a 70% chance of a cut by the July meeting, up from about 45% last week. This shift should pressure the Canadian dollar.
That means we should consider trades that benefit if USD/CAD rises. In 2025, the Canadian dollar fell by more than three cents versus the U.S. dollar in the quarter after the Bank first signaled a pause in rate hikes. Buying USD/CAD call options, or call spreads, could be a good way to position for a similar move in the coming weeks.
In rates, this data makes Government of Canada bonds more appealing. With the benchmark rate at 4.25%, yields now have more room to fall than to rise. Traders can look at buying CORRA futures, which should gain value if the Bank cuts rates as the market expects.
Lower rates can also support Canadian equities, especially sectors that are sensitive to borrowing costs, such as REITs and utilities. The S&P/TSX 60 Index has struggled to move above recent highs, but the chance of lower rates could be the catalyst it needs. Call options on broad-market ETFs can provide exposure to this potential upside.
Still, we need to watch the strong labor market. The latest report showed wage growth holding at 4.5%. Stubborn wage pressure could make the Bank of Canada more cautious than this CPI reading alone suggests. Any hawkish comments from Bank officials could quickly reverse the initial market reaction.
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