COMMENT-BoC June cut at a 50/50 call raises CA CPI importance

The upcoming Canadian inflation report will be more important than usual given that market pricing for a June rate cut by the Bank of Canada is largely a 50/50 call (0#BOCWATCH). In turn, the Canadian dollar's sensitivity to the data will be heightened.

Last week, BoC Governor Tiff Macklem put a June rate cut on the table following the big dovish surprise in the February CPI figures, whereby the bank's preferred inflation gauge – 3-month annualised median and trimmed CPI – fell to the lowest level since the beginning of 2021.

Macklem noted that, should the BoC see more of the same data they have recently observed, this would be enough to warrant lower rates. In any case, the March CPI report will be a key input into whether the Fed-BoC policy outlook will diverge further. Should this be the case, the Canadian dollar stands to lose further ground against the U.S. dollar.

Overnight USD/CAD implied vol at 9.0 has a premium/break-even for at-the-month (ATM) straddle of 51pips in either direction.

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