Insights 
VT 
Core Inflation Concerns
The EUR/CAD decreased by 0.30% on Monday, trading around 1.6250, following mixed Canadian inflation data for October. Despite cooling headline inflation, underlying price pressures remain steady, complicating potential rate cuts by the Bank of Canada.
Canada’s annual Consumer Price Index (CPI) inflation fell to 2.2%, slightly higher than the 2.1% forecast but down from 2.4% in September. Monthly CPI increased by 0.2%, aligning with predictions. Gasoline prices dropped 9.4%, and grocery inflation softened, but services costs stayed high due to insurance, taxes, and mobile service price rebounds.
Core inflation, preferred by the Bank of Canada, showed little easing, with Core CPI rising 0.6% monthly and 2.9% year-on-year. Persistent core inflation restricts the central bank’s options, particularly after suggesting rate cuts could cease if inflation does not significantly slow.
Oil market stability resumed as Russia’s Novorossiysk port reopened, easing supply concerns after a Ukrainian strike. This stabilization impacts the Canadian Dollar, as Canada is a major Oil exporter.
In Europe, the Euro sees limited support from European Central Bank comments underscoring monetary stability expectations. The mixed Canadian inflation data, cautious ECB stance, and Oil market dynamics influence EUR/CAD’s downward trend.
Bank of Canada and European Central Bank Divergence
We are seeing the Bank of Canada’s hands get tied by the persistent rise in core inflation to 2.9%. This stubbornness reminds us of the 2023-2024 period, where underlying price pressures forced the central bank to maintain a restrictive policy stance longer than expected. Consequently, markets have adjusted, with overnight index swaps now pricing in less than a 10% chance of a rate cut before the middle of 2026.
This contrasts sharply with the situation in Europe, where the European Central Bank remains firmly on hold. Last week’s Eurozone flash PMI data showed a continued contraction in manufacturing activity, giving policymakers no reason to consider a more aggressive stance. This growing policy divergence between a potentially hawkish BoC and a neutral ECB should continue to weigh on the EUR/CAD pair.
The oil market is providing a slight buffer, preventing a more rapid decline in the currency pair. With WTI crude futures struggling to break past the $85 resistance level throughout November, the usual energy-related tailwind for the Canadian dollar is diminished. This stabilization limits the loonie’s upside potential for now.
Given this environment of a clear downward bias limited by stable oil prices, traders could consider strategies that profit from limited upside. Selling out-of-the-money EUR call options or establishing bear call spreads would capitalize on the expected price ceiling in the coming weeks. With one-month implied volatility for the pair ticking up to 8.5%, premiums on these options are becoming more attractive.
