Canadian Dollar Struggles Following Inflation Undershoot

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The Canadian Dollar extended a streak of underperformance following the release of inflation data which underscored market expectations that the next move at the Bank of Canada will be a rate cut.

Canadian headline CPI inflation rose 3.1% year-on-year in October, said Statistics Canada, undershooting the 3.2% expected by the consensus and representing a material slowdown on September's 3.8%.

The Canadian Dollar has lost ground against all its peers when screened over the course of the past week and month, underscoring an idiosyncratic underperformance, which won't be overturned by these data.

The Pound to Canadian Dollar exchange rate has extended its rally to a new three-month high at 1.7185 following the inflation print, which also revealed the trimmed CPI measure - a favoured indicator with the Bank of Canada - rose 3.5% y/y in October, down from 3.7% previously and below consensus at 3.6%.

Nevertheless, The Canadian Dollar held an advance against the U.S. Dollar, the day's biggest laggard, as USD/CAD changed hands at 1.37.

The sharp deceleration in headline inflation was driven by lower petrol and diesel prices, but mortgage costs, rent and food continue to ensure prices rise at levels the Bank of Canada will be uncomfortable with.

But, for now, the market judges progress continues to be made, and the stickier elements of Canadian inflation will retreat over the coming months.

"Although the rise in services prices in this morning's report is not what the Bank would have liked to see, the overall trend in price pressures remains downward as signs of an economic slowdown persist," says Alexandra Ducharme, an economist at National Bank of Canada.

When combined with softer data elsewhere in the economy, the odds of further rate hikes at the Bank of Canada are greatly reduced and some of Canada's biggest banks are positioned for a rate cut in the coming months.

"Looking ahead, a weak economic backdrop should work to limit prices further in these measures and could allow the BoC to start cutting rates as early as Q2 next year," says Katherine Judge, an economist at CIBC Capital Markets.

Claire Fan, an economist at Royal Bank of Canada, says the Bank of Canada is done with rate hikes and will "cautiously pivot to cuts over the latter half of 2024".