Insights 
VT 
Canadian inflation for September exceeded expectations, with a year-on-year rise of 2.4%, two-tenths of a percentage point higher than anticipated. This was the second-highest month-on-month increase since stabilisation started, with the trimmed mean, a core inflation measure, also seeing a slight rise.
Bank Of Canada Considerations
Such individual monthly inflation increases are not uncommon, with long-term averages aligning with the 2% target. If this trend continues, it may prompt the Bank of Canada to reconsider their position. Recent labour market figures favour a policy move in December rather than October.
While some economists initially supported an interest rate cut in October, the latest inflation data has introduced uncertainty. The December meeting now appears more reasonable for any potential rate adjustments. In the short term, this development seems positive for the Canadian dollar.
Yesterday’s inflation figures for September came in hotter than we anticipated, with the headline rate hitting 2.4% year-over-year. This reading, along with a slight rise in the core trimmed mean, challenges the view that price pressures are consistently easing. It suggests inflation might be stickier than previously believed.
These figures significantly change the calculus for the Bank of Canada’s meeting next week. We’ve seen the market reprice accordingly, with overnight index swaps now implying only a 30% chance of a rate cut on October 29th, down from nearly 80% early last week. The probability has now shifted firmly towards the December 10th meeting.
Market Impact
This inflation surprise doesn’t stand in isolation; it follows a strong Labour Force Survey for September. The economy added a solid 45,000 jobs, keeping the unemployment rate stable at 5.5%. This robust labor market gives the central bank cover to wait and see if the inflation uptick is temporary.
For the Canadian dollar, this delay in rate cuts is a short-term bullish catalyst. We saw USD/CAD drop from around 1.3750 to below 1.3700 immediately following the data release. As long as a December cut remains the base case instead of an imminent one, the CAD should find support against currencies like the US dollar.
Derivative traders should consider positioning for continued CAD strength in the near term, or at least a cap on USD/CAD upside. Selling out-of-the-money call options on USD/CAD with expirations in late November could be a viable strategy to collect premium. This plays on the reduced likelihood of a surprise dovish turn from the Bank of Canada before December.
We should remember the lessons from early 2024, when sticky inflation similarly pushed back initial market expectations for rate cuts. That period saw the CAD outperform as other central banks were perceived as more dovish. This current situation feels like a similar pattern, where the BoC is showing a clear preference to err on the side of caution.
