Canada Watch: Headline on the rise, but core still at target

Research evidence excerpt

Canada Watch: Headline on the rise, but core still at target

Rates: CAD rates higher, curve flatter

CAD rates bear flattened 1-2bp on the stronger than expected headline inflation print

but the move was managed by the core measures, which were largely unchanged. The

market currently prices near 0 risk of a hike at the BoC’s July meeting and has priced

roughly 15-20bp of hikes for 2026. Despite economic weakness, the market will likely

continue to err on the side of pricing roughly one BoC hike for the year, especially given

Fed hike expectations. The recent MUA between the US and Iran should help stabilize oil

prices, which have a strong correlation with CAD rates. While the move today was a CAD

curve flattener, we continue to expect the divergence in central bank paths to drive the

swaps curve steeper in CAD vs flatter in the US.

FX: Subdued response, but persistent upside USDCAD

risks remain

USDCAD has stabilized around the mid 1.41-type range amid the inflation report. To the

extent that the inflation report does not shift around BoC expectations much, the direct

impact on the currency is likely to be relatively subdued. However, near-term downside

risks to CAD persist as a result of macro factors such as the potential for oil prices to

continue to generally cool, especially as USDCAD has risen consistently over the past

several weeks. Or in particular, the growing potential for the Federal Reserve to hike

rates in the second half of the year while the BoC stays on hold further increases those

risks for CAD downside.

Exhibit 1: Headline inflation rose to 3.1%, while core stayed at 2.1% in Exhibit 2: CPI excl. Gasoline rose to 2.2% in May

May Headline inflation and CPI excluding gasoline (%yoy) (2015-2026)

Headline and core inflation (%yoy) (2015-2026)

9% %yoy