07:33 AM EDT, 10/16/2024 (MT Newswires) -- Canadian expectations have been revised sharply and financial markets are now pricing in even more Canadian rate cuts than before the United States payrolls data, said Commerzbank.

This is despite the contrasting developments in interest rate expectations in the eurozone, the US and the United Kingdom, as well as the surprisingly strong Canadian payrolls last Friday, wrote the bank in a note.

In fact, this development preceded Tuesday's Canadian inflation figures. However, the figures intensified the move later in the day and ensured that markets moved even further towards the view that there could be one or even two rate cuts of 50 basis points each at the next two meetings, stated Commerzbank.

This was driven by the surprisingly sharp fall in the headline rate to 1.6% year-on-year non-seasonally adjusted while seasonally adjusted prices were unchanged in September. While core inflation measures are still just above the midpoint of the target range of 1%-3%, the headline rate is now giving rise to concerns that the inflation target is being undershot, added the bank.

The pace of disinflation has been so rapid of late that the Bank of Canada's three 75bp rate cuts to date aren't enough to make monetary policy less restrictive. Scotiabank was already inclined to expect a 50bps cut in October after BoC Governor Tiff Macklem's rather clear comments about faster rate cuts, but after Tuesday's figures, this should be almost a foregone conclusion.

Unless inflation picks up in the coming months, another 50bps cut is likely in December. As a consequence, the bank remains skeptical that the Canadian dollar (CAD or loonie) will rally "significantly" in the coming weeks.

Those hoping for lower USD-CAD levels should as such look for US dollar (USD) weakness rather than CAD strength, noted Commerzbank.