Canadian inflation for September was higher than expected, rising 2.4% year-on-year. This increase was two-tenths of a percentage point above forecasts. It marked the second-biggest monthly rise since stabilization began, with the trimmed mean—a key measure of core inflation—also showing a slight uptick.

Bank of Canada Considerations

Monthly inflation increases like this are not unusual, as long-term averages align with the 2% target. If this trend continues, the Bank of Canada may need to reevaluate its stance. Recent labor market data suggests that a policy change is more likely in December instead of October. Some economists initially favored cutting interest rates in October. However, the latest inflation numbers have created uncertainty. Now, it seems more reasonable to expect any rate adjustments during the December meeting. In the short term, this situation appears positive for the Canadian dollar. Yesterday’s inflation report for September was hotter than we expected, with the headline rate reaching 2.4% year-on-year. This, along with a slight increase in core inflation, challenges the belief that price pressures are easing. It suggests that inflation may be more persistent than we thought. These numbers significantly affect the Bank of Canada’s upcoming meeting. The market has already adjusted, with overnight index swaps indicating only a 30% chance of a rate cut on October 29th, down from nearly 80% early last week. The odds have shifted firmly in favor of the December 10th meeting.

Market Impact

This inflation surprise comes after a strong Labour Force Survey for September, which showed the economy added a solid 45,000 jobs, keeping the unemployment rate steady at 5.5%. This strong labor market gives the central bank the room to wait and see if the inflation increase is temporary. For the Canadian dollar, the delay in rate cuts is a short-term boost. After the data release, USD/CAD dropped from around 1.3750 to below 1.3700. As long as a December cut remains the expected scenario, the CAD should maintain its strength against currencies like the US dollar. Traders in derivatives might consider positioning for continued CAD strength in the near term, or at least a cap on USD/CAD gains. Selling out-of-the-money call options on USD/CAD with late November expirations could be a good strategy to earn premium. This approach anticipates a lower chance of a surprise dovish shift from the Bank of Canada before December. It’s worth recalling lessons from early 2024, when persistent inflation delayed initial market expectations for rate cuts. During that time, the CAD performed well while other central banks seemed more dovish. The current situation resembles that pattern, with the Bank of Canada showing a clear preference for caution. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now