CAD: Inflation to steer rate expectations

The Canadian dollar suffered from a contraction in oil prices yesterday, as global
demand fears appear to be overshadowing the tighter supply picture following the
OPEC+ output cuts. Our commodities team still expects Brent to close the year in
the $95-100/bbl range on the back of tighter supply, but downside risks are clearly
mounting with global recession fears.
We still want to highlight how the Canadian dollar is in a good position to benefit
from any recovery in risk sentiment (although that may only materialise from 1Q23
onwards), thanks to Canada’s limited exposure to the two major poles of
geopolitical and economic risk: Russia and China. But growing uncertainty about
global demand dynamics may further postpone any strong rebound in the loonie.
The Bank of Canada will announce policy next week, and we expect a moderation in
the tightening pace to 50bp as the economy starts to show signs of slowing and
inflation recently came in below expectations. Today, September CPI numbers will
be published, and the consensus is centred around a slowdown in headline inflation
from 7.0% to 6.7%. With markets currently pricing in 60bp ahead of next week’s
meeting, any upside or downside surprise can definitely direct rate expectations
towards 50bp or 75bp, and generate CAD volatility in both directions. In our view,
the balance of risks appears slightly skewed to the upside for CAD today, but there
is still room for USD/CAD appreciation (1.38-1.40) into year-end.

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