The pricing out of Canadian rate cuts following the surprisingly strong US payrolls data wasn’t fundamentally justified. Canadian expectations have been revised sharply and the market is now pricing in even more Canadian rate cuts than before the US payrolls data. This is despite the contrasting developments in interest rate expectations in the euro area, the US and the UK, as well as the surprisingly strong Canadian payrolls last Friday, Commerzbank’s FX analyst Michael Pfister notes.

CAD isn’t expected to rally significantly in the coming weeks

“In fact, this development preceded yesterday's Canadian inflation figures. However, the figures intensified the move in the afternoon and ensured that the market moved even further towards the view that there could be one or even two rate cuts of 50 basis points each at the next two meetings. This was driven by the surprisingly sharp fall in the headline rate to 1.6% year-on-year.”

“While core inflation measures are still just above the midpoint of the target range of 1-3%, the headline rate is now giving rise to concerns that the inflation target is being undershot. The pace of disinflation has been so rapid of late that the BoC's three 75bp rate cuts to date are not enough to make monetary policy less restrictive.”