Canada’s Consumer Price Index (CPI) rose by 0.5% month-on-month in February. This was below the forecast of 0.6%.
The February CPI monthly reading was 0.1 percentage points lower than expected. The update reports the actual figure (0.5%) against the forecast (0.6%).
The February inflation number coming in at 0.5% instead of the expected 0.6% changes our outlook on the Bank of Canada’s path. This suggests that price pressures are cooling faster than the market anticipated. This miss puts less pressure on the central bank to keep rates high and increases the probability of an earlier interest rate cut.
This new data strengthens the case for a weaker Canadian dollar in the short term. We should consider strategies that benefit from a declining CAD, such as buying put options on CAD futures or call options on the USD/CAD pair. This view is based on the interest rate differential between Canada and the U.S. likely narrowing in favor of the dollar.
This inflation report follows last week’s data showing Canadian housing starts for February 2026 fell by 3% month-over-month, another sign of a cooling economy. Swaps markets are now pricing in a 65% chance of a rate cut by the Bank of Canada’s July meeting, a significant jump from the 40% probability priced in before this release. This shift in market sentiment supports our bearish view on the currency.
For equities, this environment is generally positive, so we should look for upside in the S&P/TSX 60 Index. Lower interest rates reduce borrowing costs for companies and can stimulate economic activity. Buying call options on the index or related ETFs could provide leveraged exposure to a potential rally in Canadian stocks.
Looking back, this is a notable departure from the trend we observed through much of 2025. We recall how stubbornly core inflation remained above 3% during the second half of last year, forcing the Bank to maintain a hawkish tone. This February 2026 reading is the most concrete evidence yet that the restrictive policies of 2025 are finally working.
In the fixed-income market, we should anticipate Canadian government bond yields to continue their downward trend. This means bond prices are likely to rise. We see an opportunity in going long Canadian 10-year bond futures (CGB) to capitalize on this move.
Start trading now – Click here to create your real VT Markets account
