Canadian Dollar Slumps to 36-month Low As Inflation Print Fires the Starting Gun on Rate Cuts

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The Canadian Dollar fell against its G10 peers and was bracing for a new three-year low against the Pound after inflation numbers effectively pulled the trigger on a June interest rate cut.

Any doubts that the Bank of Canada would cut rates next month dissipated after Statistics Canada said the country's inflation rate fell to 2.7% year-on-year in April, down from 2.9% in March and undershooting estimates for 2.8%.

"This is another soft report and steady disinflationary progress has been evident for several months now," says Kyle Chapman, FX Markets Analyst at Ballinger Group. "There is no longer any question about the trajectory, and the Bank of Canada is out of excuses to dither and wait for further confirmation to cut at the June meeting."

The Pound to Canadian Dollar conversion reached a 36-month best at 1.7365 in the minutes following the data, the U.S. Dollar to Canadian Dollar exchange rate rose a third of a per cent to hit 1.3667. CAD weakness was evident against all its G10 peers.

The core inflation measures were also soft with CPI trimmed mean printing at 2.9%, as expected, down from 3.2%. CPI median read at 2.6%, below expectations for 2.7%.

"It's high time for the Bank of Canada to give the economy some oxygen, because by maintaining such a restrictive monetary policy, it risks inflicting unnecessary damage on the economy," says Matthieu Arseneau, an economist at National Bank of Canada.

Andrew Grantham, an economist at CIBC, says at the time of the April interest rate decision, the Bank of Canada Governor Tiff Macklem stated that policymakers were encouraged by recent subdued inflation readings but needed those to persist for longer before cutting interest rates.

"Since then we have received two more months of data pointing to tame underlying inflation, for a total of four in a row, and because of that we continue to forecast a first rate cut at the next meeting in June," says Grantham.

The weakness in CAD is the market moving to fully price a June cut. "Swap-implied odds on a Bank of Canada rate cut at the June meeting are rising beyond the 50-percent threshold, sending the Canadian dollar sharply lower against the greenback," says Karl Schamotta, Chief Market Strategist, at Corpay.

"No matter which variant of CPI you look at, the Canadian economy looks to be cooling off broadly, and all inflation measures are now within the tolerance band," says Chapman.

Olivia Cross, North America Economist at Capital Economics, cautions that the Bank of Canada might prefer to wait until July in order to confirm that lower core inflation will be sustained as it will have two more CPI releases to consider.

After all, headline and its favoured core readings of inflation are still not at its 2.0%, even if three-month annualised rates are consistent with this target being achieved. Furthermore, the country's labour market remains resilient, which economists say is consistent with stubborn inflation.

"Progress means there is a strong possibility of a June rate cut, although the continued resilience of the labour market means the Bank may be equally comfortable waiting until the July meeting," says Cross.

If the Bank does delay, the market will unwind recent CAD weakness.