Traders
and analysts are looking for a slight drop in headline inflation for July, with YY CPI expected to land at 1.8%, down from 1.9% in June. But the more
important core measure (Trim and Median) is expected to stay elevated around 3.1%.
This is important, because even though headline is seen drifting lower, the bank’s preferred measure of Core inflation is remaining sticky above their target band.
Right now, markets are pricing in around a 30% chance of a cut in September, and a 90% chance of a cut before year-end.
The BoC has already signalled it’s in wait-and-see mode, with several things
working together to keep inflation expectations relatively anchored:
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Wage growth and unit labour costs have cooled off a bit.
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The Canadian dollar’s recent strength has helped make imported goods a little cheaper.
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And most importantly, tariff-driven inflation pressures remain mild so far, despite ongoing trade tensions and the broader global policy uncertainty.
Despite this, Core inflation remains above the bank’s tolerance band. So while they’re in no rush to cut, they’re also not ruling anything out, especially if growth weakens further and inflation keeps gliding lower.
What could surprise markets later today?
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Hot core numbers at 3.2% or higher: If the average of median and trim prints above 3.2%, that would signal that underlying inflation is not just sticky but moving in the wrong direction. This could see markets drop cut expectations towards the end of the year. UBS recommends shorting USDCAD if this scenario unfolds.
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Big miss on bank’s preferred core at 2.9% or lower : This, for me, is the most attractive option as a short-term opportunity. A significant downside surprise, however, will likely see the rate pricing nudge up to 50/50 for a September cut. Playing some short-term CAD downside in that scenario is the most appealing to me for today.
This article was written by Arno V Venter at investinglive.com.
