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Dovish Reaction As BoC Cuts And Doesn’t Mention Core Inflation Uptick

CANADA
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  • A somewhat more dovish suite of BoC communications sees USDCAD hit 1.38 again as it tests its latest high. The bull trigger is at 1.3846 (Apr 16 high).
  • After an initial brief tick higher in GoC yields, 2Y yields are now -1.3bps since the decision vs +1bp for Tsys, with the Can-US 2YY differential increase on the day limited to just 1bp at -77.5bps.
  • BoC-dated OIS can still be volatile but is currently showing 15bp of cuts for the September meeting, tilting a little beyond the circa 50/50 implied pre-decision.

In addition to the above points:

  • The statement doesn’t make much of the recent acceleration in three-month core inflation: “Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm.”
  • Excess supply angle elevated to the final summary paragraph of the decision statement: “Ongoing excess supply is lowering inflationary pressures.”
  • Inflation forecast changes are mixed but ultimately net dovish. The increase from 2.2 to 2.4% for 2025 after an unchanged 2.4% in 2024 reflects base effects it appears. Instead, the end-year figures are revised 0.2pps higher to 2.4% for 4Q24 but then 0.1pp lower to 2.0% in both 4Q25 and 4Q26.

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  • A somewhat more dovish suite of BoC communications sees USDCAD hit 1.38 again as it tests its latest high. The bull trigger is at 1.3846 (Apr 16 high).
  • After an initial brief tick higher in GoC yields, 2Y yields are now -1.3bps since the decision vs +1bp for Tsys, with the Can-US 2YY differential increase on the day limited to just 1bp at -77.5bps.
  • BoC-dated OIS can still be volatile but is currently showing 15bp of cuts for the September meeting, tilting a little beyond the circa 50/50 implied pre-decision.

In addition to the above points:

  • The statement doesn’t make much of the recent acceleration in three-month core inflation: “Broad inflationary pressures are easing. The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm.”
  • Excess supply angle elevated to the final summary paragraph of the decision statement: “Ongoing excess supply is lowering inflationary pressures.”
  • Inflation forecast changes are mixed but ultimately net dovish. The increase from 2.2 to 2.4% for 2025 after an unchanged 2.4% in 2024 reflects base effects it appears. Instead, the end-year figures are revised 0.2pps higher to 2.4% for 4Q24 but then 0.1pp lower to 2.0% in both 4Q25 and 4Q26.