CPI to endorse aggressive dovish bets – ING

Canada’s inflation is expected to slow further today. The consensus for August headline CPI is 2.1%, essentially at the Bank of Canada’s target mid-point, while all core measures of inflation are seen decelerating by around 0.2%YoY. Remember that core inflation is already well within the BoC’s 2-3% target band, and we believe today’s print will do very little to discourage the ongoing dovish bets on BoC easing, ING’s FX strategist Francesco Pesole notes.

CAD remains less attractive than other high-beta currencies

“If growing expectations for a 50bp Fed cut largely stem from the notion that the FOMC is starting its easing cycle too late, the same cannot be said for the BoC, whose policy rate has already been cut three times and is sitting at 5.25%, 125bp below the Fed funds rate. However, as it often happens, Fed pricing has a huge influence on BoC pricing, and markets have recently moved to price in 75bp worth of cuts in Canada over the next two meetings.”

“The September policy announcement is next week, and we suspect the BoC may opt for a 25bp even if the Fed cuts 50bp tomorrow and Canada’s inflation slows as expected today. We cannot exclude that this will be followed by a 50bp reduction at the December meeting, but we continue to favour 25bp steps by the BoC.”

“Accordingly, we think that the Canadian dollar can benefit from some hawkish repricing over the coming months. USD/CAD is struggling to make its way steadily below 1.35 and recently jumped back to 1.36 as oil prices fell. Our view remains that Fed easing can ultimately help a multi-quarter USD/CAD decline materialise, but for the moment some stabilisation is more likely, as CAD remains less attractive than many other high-beta currencies.”