Anna 
The Canadian dollar has lagged behind other pro-cyclical currencies since the start of May, primarily due to its sensitivity to U.S. economic data and Federal Reserve rate expectations. Market analysts have been forecasting a 25 basis point rate cut by the Bank of Canada in June, a stance that has remained unchanged for several months. This anticipated policy shift is expected to reduce the Canadian dollar’s attractiveness compared to other commodity-linked currencies.
One of the key arguments supporting the potential rate cut in June has been the proximity of inflation to the target range. However, a surge in job creation in Canada in April has challenged this dovish outlook. The release of April’s Consumer Price Index (CPI) data today is critical, as it could influence market expectations regarding the June interest rate decision. Analysts are particularly focused on whether the core CPI “trim” measure will align with the “median” core inflation indicator preferred by the Bank of Canada, potentially falling below 3%. If all key inflation metrics, both core and headline, fall within the 1-3% target range, it could complicate the Bank of Canada’s justification for maintaining a restrictive monetary policy.
Currently, the market appears to be underestimating the likelihood of a June rate cut, with only an 11 basis point adjustment priced in. There is also speculation that the Canadian dollar could weaken further as the potential rate cut becomes more anticipated, leading to increased dovish positions on the Canadian interest rate curve. Should inflation decline as expected in today’s data, the USD/CAD pair might approach the 1.3700 level again in the near term. Additionally, currency pairs such as CAD/NOK and NZD/CAD could more clearly reflect the policy divergence.
