Canada’s Consumer Price Index (CPI) rose 2.3% year on year in January. This was below the forecast of 2.4%.
The CPI result indicates inflation was slightly lower than expected for the month. No other figures were provided.
This lower-than-expected inflation reading at 2.3% gives the Bank of Canada a reason to consider cutting interest rates sooner. We’ve seen the market rapidly re-price the odds of a rate cut, with overnight swaps now implying a nearly 70% chance of a cut by the July meeting, up from just 45% last week. This should put downward pressure on the Canadian dollar.
We should therefore consider strategies that benefit from a rising USD/CAD exchange rate. Looking back at 2025, we saw the Canadian dollar weaken by over three cents against the greenback in the quarter after the Bank of Canada first signaled a pause in its hiking cycle. Buying USD/CAD call options or call spreads could be an effective way to position for a similar move in the coming weeks.
In the interest rate market, this data makes Government of Canada bonds more attractive. With the current benchmark rate at 4.25%, the path of least resistance for yields is now lower. Traders should look at buying CORRA futures contracts, which will gain value if the central bank cuts rates as the market now anticipates.
This environment could also provide a boost for Canadian equities, particularly rate-sensitive sectors like real estate investment trusts and utilities. The S&P/TSX 60 Index has been struggling to break its recent highs, but the prospect of lower borrowing costs could provide the necessary catalyst. We can use call options on broad market ETFs to gain exposure to this potential upside.
However, we must remain aware of the strong labor market data, as the most recent report showed wage growth is still holding firm at 4.5%. This persistent wage pressure could make the Bank of Canada more cautious than the inflation print alone suggests. Any hawkish talk from Bank officials could quickly reverse these initial market reactions.
