Canada’s upcoming August CPI report is expected to confirm that while core inflation remains elevated, underlying pressures are gradually easing, according to FX analysts at Brown Brothers Harriman (BBH). This should give the Bank of Canada (BoC) room to continue with rate cuts, especially amid growing signs of labor market weakness. As a result, the Canadian Dollar (CAD) remains at risk of underperformance, particularly against currencies backed by more hawkish central banks, like the Australian Dollar (AUD) and Norwegian Krone (NOK).
BoC Expected to Stay on Dovish Track
The August CPI data (due at 1:30pm London / 8:30am New York) is unlikely to alter the BoC’s easing trajectory. Minutes from the BoC’s July 30 meeting revealed that some members already anticipated the need for further monetary support, especially if labor market conditions deteriorated and inflation risks failed to materialize.
The BoC has held rates steady since April, but weak labor market data is reinforcing expectations for a return to rate cuts. The Canadian economy lost 65,500 jobs in August and 40,800 in July, signaling a clear slowdown in employment momentum.
Inflation Stable but Losing Steam
While headline inflation is expected to tick up to 2.0% year-over-year in August (from 1.7% in July), this increase is mostly due to base effects. Core inflation—measured by the average of trimmed mean and median CPI—is expected to remain steady at 3.05%, suggesting that underlying price pressures are not accelerating.
Markets Expect a Rate Cut
According to swap markets, there is nearly a 90% probability that the BoC will cut rates by 25 basis points to 2.50% at its next meeting. Additionally, markets are pricing in over 80% odds of another 25 bps cut by year-end, which would bring the terminal policy rate to 2.25%.
CAD Under Pressure Against AUD and NOK
With the BoC leaning dovish, especially in contrast to the more hawkish stances of the Reserve Bank of Australia (RBA) and Norges Bank, CAD is expected to remain under pressure. BBH notes the policy divergence is a key reason why the Canadian Dollar may continue to underperform against the AUD and NOK in the near term.