TD Securities strategists note that Canadian headline Consumer Price Index (CPI) for May surprised to the upside, driven by energy and seasonal factors, while core measures remained stable near 2%. They argue this keeps inflation above Bank of Canada (BoC) projections but still allows policymakers to look through headline strength and stay on hold through 2026, with CAD bearishness seen as stretched.

BoC seen staying on hold through 2026

"Headline CPI surprised to the upside at 3.2% y/y in May as prices rose by 1.0% m/m, fueled by another large contribution from energy products along with seasonal tailwinds and some mean reversion in travel-related components. CPI-trim/median were unchanged at 2.0%/2.1% y/y, but firmed to 2.3% on a 3m annualized basis."

"The upside surprise in May leaves CPI tracking further above BoC projections from the April MPR, but we do not see anything in this report to keep the Bank from looking through headline CPI going forward. Core inflation measures are not showing any broad pressures from higher oil prices and indicators of CPI breadth declined from April. We look for the BoC to remain patient and stay on hold through 2026."

"Our views around the BoC remain the same, as the Bank can remain comfortably on the sidelines even as impacts from the war materialize in the data."

"Firmer inflation on the margin is taking some heat off of CAD. CAD bearishness is starting to look stretch and could reverse if Canadian data starts to stabilize. While it is hard to fight near-term USD strength, we like short AUDCAD on the crosses."

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