CAD: Dovish CPI keeps BoC cautious – TD Securities

TD Securities analysts note Canadian Consumer Price Index (CPI) accelerated to 2.4% year-on-year in March, driven by higher Oil prices, but core measures remained subdued. They see the print as dovish and consistent with Bank of Canada (BoC) guidance to look through temporary spikes. They expect current market momentum to persist and maintains a bias toward long 2-year bonds and Jun/Dec flatteners.

Soft core inflation and curve trades

"Headline inflation accelerated to 2.4% y/y as prices rose 0.9% m/m, missing the market's expectations by 0.2 p.p (market: 2.6%, TD: 2.5%)."

"Higher oil prices drove the headline, but stabilization in core inflation kept the print on the dovish side. Further details also contributed to the dovishness, with ex-food/energy falling slightly and 3m annualized rates of core inflation still below target."

"All in all, the BoC has clearly signalled they are willing to look through near-term inflation spikes and as such, we see this print consistent with their current tone and continued cautiousness."

"Despite the downside surprise, there wasn't a huge reaction from rates as yields remain a bp within levels prior to the print and CAN-US spreads only 1-2 bps tighter. We'd expect it to take a couple more prints like this to convince the market to fully recover from the peak pricing in March, but expect current momentum that we've seen so far to continue."

"We are still biased toward long 2s and Jun/Dec flatteners, as hawkish pricing for 2026 is walked back by the market."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)