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Canada's core inflation unexpectedly remained unchanged, and the possibility of a consecutive rate cut in July slightly decreased

2024-07-17

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The Canadian dollar rose against most G10 currencies except the U.S. dollar after Canada's CPI rose 2.7% year-on-year in June, according to market analyst Gary Howes. Statistics Canada said Canada's unadjusted CPI for June was -0.1% month-on-month, below market expectations of 0.1%. The inflation data supports the possibility of a rate cut by the Bank of Canada later this month, which will be unfavorable to the Canadian dollar.

However, the Bank of Canada is particularly interested in core inflation measures, believing that this basket of goods and services will respond to the interest rate level it sets.

"Canada's headline inflation rate slowed as expected last month, but the Bank of Canada's closely watched core inflation measure remained surprisingly unchanged, arguably making the central bank slightly less likely to cut interest rates at its July meeting," said Karl Schamotta, chief market strategist at Corpay.

Both measures of core inflation - the revised CPI and the median CPI - rose 0.24%, above the 0.17% growth rate, which is consistent with a 2% inflation rate. The closely watched 3-month CPI revised and CPI median annualized changes rose further to 2.9% in June.

"Swaps for a rate cut at next week's Bank of Canada meeting imply that odds are strengthening, causing the Canadian dollar to fall," said Schamotta.

The market currently sees a 92% chance of a rate cut by the Bank of Canada this month. However, if the Bank of Canada disappoints these expectations by keeping rates unchanged, the Canadian dollar could rebound on the surprise.

The Bank of Canada will hold its rate decision at 21:45 Beijing time on July 24.

"As central banks often make statements from meeting to meeting, the recent acceleration in the Bank of Canada's preferred underlying inflation measure may prompt policymakers to delay rate action and take a wait-and-see stance," said market analyst Justin McQueen.

While there were some unexpected surprises in the data, giving the Bank of Canada some flexibility, one analyst said the anti-inflation trend was intact, allowing the Bank of Canada to cut rates next week. "The core inflation data for June won't worry the Bank of Canada," said Matthieu Arseneau, an economist at the National Bank of Canada. "The data is consistent with our view that the Canadian economy is in dire need of oxygen, and we still expect a rate cut in July."

Kyle Chapman, a foreign exchange market analyst at Ballinger Group, said these inflation data confirm that the rise in inflation in May was just a short-lived blip in a deflationary trend that remains very much alive. Progress is not as rapid as at the beginning of the year, but the Bank of Canada is still getting the money it needs to get approval to cut rates again next week. All indicators are still within tolerable ranges, and given weak demand, it's hard to imagine where the economy will reaccelerate from.

Chapman believes that continued progress in disinflation, widening cracks in the labor market, and the possibility of three more rate cuts by the Bank of Canada in 2024 are all "powerful factors for continued weakness" in the Canadian dollar.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Canada's core inflation unexpectedly remained unchanged, and the possibility of a consecutive rate cut in July slightly decreased

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