Canada CPI Trim Consistent Dellamotta’s view that the Bank of Canada will stay on the sidelines seems fair, but we believe the market is missing a key detail. The headline rate of 1.9% is misleading. The real issue lies in the core components, which are showing troubling signs that people are overlooking. Core year-over-year CPI is increasing at 2.7%, while the BoC’s preferred median and trim measures are stubbornly at 3.1% and 3.0%, respectively. The idea of a smooth return to the target inflation rate is unrealistic. This isn’t a gentle landing; it’s a rough descent, and there’s a serious risk of needing to pull up. History Repeating Itself We’ve seen this scenario before. In the first half of 2023, the BoC paused rate hikes but had to raise them again in June and July due to persistent inflation. Now, the market is becoming too comfortable, which presents an opportunity. Right now, overnight index swaps suggest nearly 40 basis points of cuts by the end of the year. We believe this is inaccurately priced. The Bank has emphasized its reliance on data, and this report does not support a more dovish stance. If anything, it suggests the opposite. For derivative traders, this situation calls for buying cheap volatility. With the market expecting a steady approach from the BoC, implied volatility on short-term Canadian dollar options has dropped, sitting just above 6.0%. This seems too low given the clear difference between headline and core inflation rates. We plan to buy options structures, like straddles or strangles, ahead of the September and October BoC meetings. If the Bank leans hawkish in its language, it could cause a significant market adjustment, which would benefit our positions. Moreover, the rise in durable goods prices—also noted in the US—adds more complexity. This isn’t only about domestic inflation; external supply chain and trade issues are impacting it too. According to the latest data from Statistics Canada, prices for motor vehicles—a key durable good—have significantly contributed to monthly inflation. This situation complicates the BoC’s task since monetary policy is a blunt tool against such pressures. This persistence leads us to expect a shift away from the market’s dovish pricing. We are positioning for a flatter or even inverted yield curve by paying front-end rates while receiving longer-term rates, anticipating that the market will have to delay its rate cut timeline. Create your live VT Markets account and start trading now.

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