The loonie is set for its worst run of losses in more than seven years after a soft report on Canadian consumer prices amped up bets that the Bank of Canada will ease borrowing costs by a quicker pace in the weeks ahead.

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The Canadian dollar fell as much as 0.3 per cent against the greenback to the day’s low around US$1.3839 after the release of consumer price index figures before paring the move later in the session. The report showed inflation in September growing at the smallest annual pace in more than three years and below the Bank of Canada’s two per cent target. Canadian debt rallied across the curve.

Swaps traders added to bets that the central bank will ease monetary policy by more than a quarter-point when officials next meet later this month. Market pricing now suggests some 45 basis points worth of interest-rate cuts at the Bank of Canada’s meeting on Oct. 23, up from around 39 basis points on Monday.

“This definitely raises the likelihood of a half-point cut as inflation is within target range and weaker than what Bank of Canada was projecting for the third quarter,” said Jayati Bharadwaj, a currency strategist at TD Securities. Bharadwaj expects the loonie to grind lower but said the $1.39 level is a technical barrier against further weakness.

The Canadian dollar has stumbled since reaching a six-month high against the greenback in late September as traders assess the Bank of Canada’s policy rate path relative to other Group-of-10 peers. The central bank was among the first to begin easing borrowing costs this cycle in June, followed by the United States Federal Reserve in September.

Citigroup economists including Gisela Hoxha and Veronica Clark on Tuesday reiterated their call for the Bank of Canada to cut rates by 50 basis points this October. At Macquarie, the deceleration in inflation prompted economists to change their expectation to a half-point cut next week from a quarter-point move.

“An updated growth and inflation forecast in the Monetary Policy Report will likely serve as justification for the shift,” wrote Macquarie’s David Doyle. “Risks to this remain skewed towards a more front loaded easing cycle.”

—With assistance from Edward Bolingbroke and Jay Zhao-Murray.

Bloomberg.com