Insights 
VT 
The Governor of the Bank of Canada, Tiff Macklem, emphasised the current volatility in inflation rates. He stressed the importance of not focusing too heavily on individual monthly figures.
Since April, the chances of the BOC’s ‘severe’ scenario occurring have decreased. The Governor’s comments about potential future rate cuts are not intended as definitive guidance.
Currency Impact on Inflation
Currency strength of the Canadian dollar (CAD) is mentioned as impacting inflation levels. Officials aim to return to issuing a single central scenario by July, as market sentiments remain positive.
Economic effects of forest fires have been acknowledged. On the currency front, the USD/CAD exchange rate has fallen to its lowest point since October.
The overall odds of a potential interest rate cut in July stand at 40%, with the recent comments not construed as strongly dovish.
Macklem’s remarks serve as a reminder that policy decisions don’t hinge on short-term data movements. Instead, what matters is whether the broader trend in inflation matches the longer-term targets. We prefer to look at these persistent patterns over time, not the month-to-month noise. This keeps us from misreading temporary shifts as signals for lasting change.
Although back in April there was more concern around a worst-case outcome, that risk is now less acute. It helps explain why current pricing doesn’t lean heavily towards deep rate cuts. What’s come from the Bank so far points to caution rather than urgency. No particular path is promised, and none of the statements this week should be read as a plan locked in.
When looking at price pressures more generally, the strength of the Canadian dollar, which has risen against the US dollar lately, does make imported goods cheaper. This works as a dampener for inflation. That, in turn, may soften the pressure on policymakers to act aggressively. But just because CAD has gained ground recently, it doesn’t mean we can count on that continuing – especially if broader sentiment toward the US dollar shifts.
Officials now want to return to issuing a single scenario in their forward guidance, potentially by July. That should bring more clarity after a period of split forecasts. It likely reflects confidence that the most pessimistic outcomes are drifting further into the background. This month’s tone has been moderately optimistic, with participants feeling more balanced.
Wildfires and Economic Activity
Another factor that’s been raised relates to wildfires. There’s acceptance that these events affect economic activity, particularly through disruptions in output, transport, and consumption patterns. While such disruptions can push up prices in the short run, they don’t usually lead to longer-term inflation. Nonetheless, we keep an eye on second-round effects, especially if rebuilding efforts later stir up extra demand.
On the currency pairing, the USD/CAD has now slipped to lows not seen since October. That tells us something about current market preference, and possibly about the outlook for interest rate differences between the two nations. As yields move, the currency follows.
Currently, markets put the likelihood of a rate cut in July at around 40%. That’s not low enough to dismiss entirely, but not high enough to count on, either. The Bank’s latest language hasn’t shifted substantially toward easing; instead, it suggests a continued wait-and-see approach.
For those of us watching derivative pricing, the absence of strong steering means implied volatility could remain relatively subdued in the near term. Evening out positioning could be sensible. Rather than chasing short-term narratives, keeping close to options that balance against both flatter and steeper rate curves may provide better coverage. Data over the next two weeks will likely cause a refinement of pricing, not a reversal.
