The April inflation figures released in Canada on Tuesday came in well below expectations, said Commerzbank.
Although the year-on-year headline rate increased from 2.4% to 2.8%, this was still lower than the 3.1% anticipated by the market. As expected, the increase is almost entirely due to rising gasoline prices. The various core measures, on the other hand, declined unexpectedly, standing at almost exactly 2% year over year, the bank said in a note to clients.
Many countries are currently debating the sustainability of the recent energy price shock and the responses of central banks. In Canada, however, this is likely to be a much smaller problem, stated Commerzbank. This is certainly due to the fact that Canada is a net energy exporter. But also due to the weak labor market, which is unlikely to justify wage pressures as strong as those seen four years ago.
As a consequence, Commerzbank continues to have its doubts about market expectations of two interest rate hikes by the Bank of Canada by the end of the year.
For the Canadian dollar (CAD) however, this doesn't necessarily have to be a bad thing. If the conflict in Iran were to end permanently, many market expectations regarding interest-rate hikes would likely no longer be sustainable. Then, relatively speaking, performance would likely shift to the CAD's favor.
If the Canadian real economy were to recover in the second half of the year, the BoC could raise rates in December. But it would be for different reasons than the market currently anticipates. It will nevertheless take some time for this view to gain traction.
Fortunately, the CAD is currently benefiting from its independence from energy imports, added the bank.