Raw Material Price Index Performance

The Raw Material Price Index (RMPI) rose by a slight 0.3% from last month, down from 2.7%. When we leave out energy products, the RMPI increased by 0.4%. Year over year, raw material prices went up by 0.8%, and if we exclude crude energy products, the jump is 12.6%. Gold, silver, and platinum experienced a big year-over-year increase of 30.9%. Cattle and calves rose by 17.1%, while hog prices grew by 18.1%. However, conventional and synthetic crude oil prices fell by 18.0% and 15.2%, which moderated the RMPI increase. This August’s producer price data was stronger than anticipated, showing that factory gate inflation is rising. The Bank of Canada will likely see this as a warning that inflation is persisting. As a result, we may need to consider a more aggressive approach from the central bank in the upcoming weeks. Due to this unexpected data, we can expect higher short-term interest rates than what the market predicted. Reviewing the aggressive rate hikes in 2022 and 2023, we know the Bank takes strong inflation data seriously. We should adjust derivative positions to prepare for a possible rate hike at the next meeting.

Implications for Currency Market and Interest Rates

The Canadian dollar is in a complicated situation. A hawkish central bank is a positive factor, but the drop in crude oil prices is a major challenge. Since 2024, the dollar has struggled even with higher interest rates in a weak oil market. Options strategies that benefit from increased volatility in the USD/CAD pair may work well here. The report indicates a move toward safe investments, as precious metals surged due to high demand for safety. This trend persisted throughout much of 2024, with gold hitting record highs above $2,400 per ounce. It may be wise to consider long positions in gold and silver using call options to take advantage of this momentum. Meanwhile, the sharp decline in energy prices shows ongoing weakness in that area. The 18% year-over-year drop in conventional crude oil is significant. This could be a signal to buy put options on oil futures for protection and potential gains. The notable rise in softwood lumber prices is also a key signal, reminiscent of the significant rally in 2021 when prices tripled in less than a year. This suggests that supply chain issues may be returning in certain sectors. A small, speculative long position in lumber futures or calls might be advisable. For the broader equity market, this inflation report presents challenges. A more aggressive central bank means higher borrowing costs, which can slow economic activity. It may be wise to buy protective put options on the S&P/TSX 60 index to guard against a possible market downturn. Create your live VT Markets account and start trading now.

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