Canada’s Bank of Canada core Consumer Price Index (CPI) rose to 2.5% year on year in March. This was up from 2.3% in the previous reading.
The change shows core inflation increased by 0.2 percentage points from the prior month. The data refers to the Bank of Canada’s core CPI measure.
This jump in core inflation to 2.5% signals that underlying price pressures are proving stubborn. This moves the Bank of Canada further away from its 2% target, making an interest rate cut in the near term highly unlikely. We should be positioning for a more hawkish tone from the central bank in the coming weeks.
Given this, we see opportunities in selling interest rate futures, such as the three-month CORRA contracts, as the market prices out imminent rate cuts. In fact, overnight swaps now imply less than a 10% chance of a rate cut by the June meeting, a sharp drop from last week. The Canadian 2-year bond yield has already jumped 15 basis points, reflecting this new reality.
This revised outlook should provide a tailwind for the Canadian dollar, particularly against currencies with more dovish central banks. We are looking at buying CAD futures or using options to establish long positions on the loonie. This move comes as recent data shows Canadian average hourly wages grew by 4.8% year-over-year, adding fuel to inflationary concerns.
This is a notable shift from the disinflationary trend we observed for much of 2025. During that time, we saw the Bank of Canada hold rates steady with the expectation that inflation would continue its path downward. This recent data now questions the narrative that the fight against inflation is over.
For equity derivatives, this environment is a negative, as higher borrowing costs can pressure corporate earnings. We should consider buying put options on the S&P/TSX 60 index as a hedge or a speculative short position. The increased uncertainty also suggests that implied volatility may rise, making long volatility strategies potentially attractive.
