Canadian Dollar Falls: Inflation Secures 50bp Bank of Canada Rate Cut

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The Canadian Dollar was sold after inflation proved softer than markets were expecting in September.

The Pound to Canadian Dollar exchange rate (GBP/CAD) surged to within touching of 2024 highs at 1.8097 after Statistics Canada said CPI inflation read at 1.6% year-on-year in September, which was below the 1.8% the market was expecting.

The decline in y/y inflation was underpinned by September's outright deflationary -0.4% month-on-month print, which was deeper than the -0.2% recorded in August.

The fall in the Canadian Dollar confirms markets think the data is enough to push the Bank of Canada into a 50 basis point interest rate cut next week, cementing it as the most 'dovish' central bank in the G10.

"Canadian headline inflation decelerated by more than expected last month, lowering the hurdle to an outsized rate cut at next week’s Bank of Canada meeting," says Karl Schamotta, FX strategist at Corpay.

GBP/CAD's highest close for 2024 is at 1.8091, which puts the exchange rate on course to break this landmark if gains can be sustained into the close.

USD/CAD extends its rally for a tenth consecutive day of uninterrupted gains to 1.3825, the highest level it has closed in 2024 is 1.3873. EUR/CAD is higher at 1.5081, however EUR underperformance means the exchange rate is still some way off the key 1.5150 highs of August and September.

Investment bank GBP/CAD consensus forecasts: The end-2024 and 2025 guide from Corpay has been released. Featuring the median, mean, high and low points forecasted by over 30 investment banks. Please request a copy here.

"Canadian yields have slumped and bets on a 50bps rate cut next week have surged to nearly 80% as inflation fell to 1.6% in September - significantly below the 2% midpoint," says Kyle Chapman, FX Markets Analyst at Ballinger Group.

Looking at the details, falling oil prices and airfares were significant drivers of inflation's surprisingly soft tenor.

Rents are still an issue, rising 8.2% in September; however, this is significantly down from 8.9% in August.

"It is the rapid rent disinflation that is the clearest signal for the Bank of Canada to pick up the pace and head toward neutral," says Chapman.

Elsewhere, Canada's core inflation rate is now averaging 2.1%, which will put to bed fears that inflationary risks are tilted higher.

"Without a 50bp rate cut next week, the BoC risks rapidly falling behind the curve and exacerbating the already weak growth outlook. I am more convinced now than I was last week that the strong jobs data was an unhelpful outlier, and it is more than offset by this inflation report. There is no excuse to do anything but a 50bp move; no room for excessive caution," says Chapman.