Only short back and forth in the CAD - Commerzbank

What is interesting about today's Canadian inflation figures is that they could provide an indication of how much further the Bank of Canada (BoC) could lower its rates. That further cuts are likely was clear from the BoC's statement at the last meeting. After all, in his opening remarks at the last meeting, central bank governor Tiff Macklem said that further rate cuts can be expected as long as inflation continues to weaken as expected, Commerzbank's FX analyst Antje Praefcke notes.

Movements in the CAD are likely to be limited

"As a reminder, the BoC has cut rates by 25 basis points at each of the last three meetings, leaving the key rate at 4.25%. We see a good chance that the BoC will cut by a further 25bp at each of the last two remaining interest rate meetings this year, leaving the key rate at 3.75% at the end of the year. The market is even a bit more aggressive in its expectations and sees a chance that the BoC could even take a larger step."

"In addition to the comments by the central bank governor, this may be due to the fact that the labor market report for August, which was published after the last BoC meeting, was quite weak: the unemployment rate rose further to 6.6%. At the same time, the ISM index for the manufacturing sector fell below the 50 mark in August, which could mean weaker growth for the second half of the year if the downward trend continues."

"Inflation is likely to have continued to fall in August, maintaining the picture of further falling key rates in Canada. If the headline and core rates fall less than expected, the market could price out some of the current rate cut expectations and the CAD could appreciate somewhat in the short term. If the figures surprise on the downside, the market may feel confirmed in its view. However, movements in the CAD are likely to be limited, except for a possible brief back and forth immediately after the figures."