Canada’s annual CPI inflation rose to 2.4% in March from 1.8% in February, below the 2.5% forecast, Statistics Canada said. Monthly CPI increased 0.9% after a 0.5% rise in February, under the 1.1% estimate.
The Bank of Canada’s core CPI, excluding food and energy, rose 2.5% year on year, up from 2.3% in February. USD/CAD showed little immediate movement and traded near 1.3700.
Ahead of the release, forecasts pointed to monthly CPI at 1.1% and annual CPI at 2.5%. Core measures were expected at 0.3% month on month versus 0.4% previously, and 2.4% year on year versus 2.3%.
The Bank of Canada held its benchmark rate at 2.25% on 18 March. It has lowered rates by 2.75% over the past two years.
Other recent data cited included a 0.2% economic contraction in the last quarter of 2025 and 0.1% GDP growth in January. Markets were described as pricing around 40bp of tightening by December.
USD/CAD levels referenced included 1.3650–1.3670 support and 1.3525. Resistance points noted were 1.3735, near 1.3790, and around 1.3875.
With the March inflation data coming in softer than expected at 2.4%, the immediate pressure on the Bank of Canada to raise interest rates has faded. This gives the central bank cover to prioritize the fragile economy, which we saw contract in the last quarter of 2025. We should therefore unwind any positions that were betting on an aggressive rate hike in the second quarter.
The Bank of Canada Governor confirmed this cautious stance in a speech last week, emphasizing downside risks to growth. This view is reinforced by the latest jobs report from Statistics Canada, which showed the economy added only 12,000 jobs in March, far below expectations, pushing the unemployment rate up to 6.2%. These data points make a rate hike before the fall highly improbable.
Given this outlook, implied volatility on interest rate options should decline as the market prices out the risk of a near-term hike. We see an opportunity in selling short-dated call options on CORRA futures. This strategy would profit from both the passage of time and the market’s acceptance of a more patient central bank.
The initial energy price shock from the conflict in Iran also appears to be easing from the levels seen in February and March. WTI crude oil prices have fallen from a high of over $105 per barrel to around $94, a drop of over 10%, as supply chain fears have moderated. This should further soften headline inflation in the April and May reports, supporting the Bank of Canada’s decision to wait.
For the Canadian dollar, this situation creates a complex picture for the USD/CAD pair. The reduced stagflation risk offers the loonie some support, but the underlying weakness of the Canadian economy remains a major headwind. Any sign of renewed US economic strength could easily overwhelm this and send the pair moving back toward the 1.3800 level.
This points toward trading volatility rather than direction in the currency markets. We believe purchasing at-the-money straddles on USD/CAD with a two-month expiry is a prudent strategy. This position will profit from a significant price move in either direction, which seems likely given the conflicting economic signals.
