AUDUSD TECHS: Northbound

Some of the more cautious interpretations of the May data include those of National Bank, BMO, and Scotiabank:

• National was relatively neutral on the implications, still expecting a July cut: "We wouldn’t say this report significantly leans towards a cut or a hold when looking to next month’s decision (although the market interpreted it slightly hawkishly). While overall inflation remains reasonably well contained (headline or excluding taxes), there’s still a bit of uncomfortable pressure in the core segment. Tariff-driven inflation risks are also weighing on the central bank. It means that, when pricing the July 30th decision, markets will continue to hover in “uncertainty territory” until additional important data is released. To be sure, there's still a lot to go before the next meeting, including another CPI report next month, GDP, jobs data and a Business Outlook Survey. Our baseline forecast involves a July cut but that's very much a data dependent call. We'll need to see more co-operation in the next month, via a softer June inflation report and/or continued weakness in the labour market."
• BMO saw worrying dynamics in the CPI that reduced chances for a July cut, though they still appear to expect one: "The latest inflation results are broadly similar to April's outing—a deceptively calm headline number with core hovering too far above the 2% target for comfort. The BoC will likely need to see much more improvement before it's convinced that underlying inflation is headed back to 2%. The small counterpoint is that evidence is building that the economy is beginning to more fully feel the weight of U.S. tariffs, as the flash on manufacturing sales for May showed a 1.3% drop. The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI."
• Scotiabank, which also envisages the BOC's easing cycle already at an end, says the central bank shouldn't be considering cutting rates: "Core inflation remains too warm to be contemplating rate cuts. Ignore the headline CPI reading that continues to be weighed down by the elimination of the consumer portion of the carbon tax; it’s below the 2% target, but the tax distortion makes that meaningless. The bigger issue here is that underlying price pressures remain too high and rising breadth combines to signal that inflation has yet to be licked. To twist a phrase, the Bank of Canada shouldn’t even be thinking about thinking about when to cut rates."

Analysts' interpretations of the May CPI data were mixed, in keeping with a relatively mixed report that was broadly-speaking in line with expectations. Below are a few opinions in order of most dovish-to-hawkish interpretations for BOC policy, particularly re a July cut which still appears to be the consensus call (though still only 1-in-3 probability per rate market pricing, little changed from pre-data). Starting with Desjardins, TD, CIBC and RBC which viewed the report as relatively benign:

• Desjardins continues to expect a July cut after a "good" inflation reading: "The May 2025 inflation print was good all around. Of concern for the BoC at its June meeting. was the recent reacceleration in core inflation measures. Our view was that this boost was temporary, and the turn in underlying inflation in May suggests that assertion may be correct. And with headline inflation below 2% and likely to remain low for the next year as a result of the elimination of the consumer price on pollution and weaker growth,  inflation expectations should start to come down. If they do, this will give the Bank of Canada even more room to ease policy than it might have had otherwise. Consequently, after leaving the policy rate unchanged in June due to the uncertainty of the tariff-impacted economic outlook and accelerating core inflation, we think the BoC will resume cutting at its July meeting."
• TD saw the report as a "relief", and also sees a July cut: "Overall, the combination of stable headline inflation alongside some modest progress across core measures will be a relief for BoC officials, even if it falls short of their desire to see inflation "contained" ahead of the July policy decision. With one more CPI print due before July 30th, today's report was never going to give the Bank a green light to cut, but it could have taken a July cut off the table entirely if core inflation measures continued to strengthen. The path to a July cut remains intact, but we still need to see more evidence of growth headwinds materializing with industry-level GDP on Friday, and today's progress sustained through the June CPI report."
• CIBC saw the data as "a step in the right direction" for the July cut they expect. The BOC "will need to see the moderation in core measures maintained in the next report to deliver the July cut that we expect. Tariff impacts will become more evident in the releases ahead, but we look for waning demand tied to the rise in the unemployment rate to provide an offset, along with the appreciation in the Canadian dollar, and a deceleration in shelter inflation."
• RBC continues to see no further rate cuts, though noted overall that the report showed inflation "cool" in May: "The Bank of Canada appears to have reached the end of its cutting cycle, with the policy rate now in the middle of the neutral range. While it has left the door open to further easing, that would likely depend on clearer signs of economic weakness alongside contained inflation. In the near term, tariff-related uncertainty could keep (after-tax) inflation slightly elevated, but we continue to expect it to trend close to target further out."

Decent SOFR option volumes revolved around calls for the most part Tuesday, Treasury options muted. Underlying futures firmer, near top end of the session range as Israel/Iran hostilities appear to de-escalate. Projected rate cut pricing largely gaining vs. morning levels (*): Jul'25 at -4.7bp (-5.7bp), Sep'25 at -25.3bp (-24.2bp), Oct'25 at -41.2bp (-39.7bp), Dec'25 at -59.6bp (-56.6bp).

• SOFR Options:
  • +15,000 SFRU5 95.68/95.75/95.81 2x1x1 put trees, 0.0-0.25
  • +2,000 SFRZ5 96.25 straddles, 44.5 ref 96.22
  • +5,000 SFRQ5 96.00/96.12/96.25/96.37 call condors, 1.5 ref 95.915
  • Block, 10,000 SFRN5 96.00/96.12 call spds 1.75 ref 96.845
  • +10,000 0QQ5/0QU5 96.50/96.75/97.00call fly strip, 10.5 ref 96.795
  • +10,000 0QZ5 96.75/97.00/97.50/97.75 call condors, 7.0 ref 96.845
  • +31,800 0QU5 97.25/97.50 call spds, 3.5
  • Block/screen, 4,000 SFRQ5 95.75/95.87/96.00 2x3x1 put flys, 1.5 ref 95.935
  • -6,000 SFRQ5 96.25/96.375 call spds, 1.0 vs 95.96/0.05%
  • -2,500 SFRN5 95.75/95.87/96.00 put fly, 5.0
  • +2,500 SFRQ5 96.1875/96.3125 call spd, 1.5
  • +8,000 SFRN5 96.25/96.375 call spd w/ SFRQ5 96.1875/96.3125 call spd strip, 1.75 total
  • +2,000 SFRZ5 95.75/96.00 put spd 1.0 over 96.25/96.50 call spd
  • -3,600 SFRN5 95.75/95.87/96.00 put fly, 5.0 ref 95.935
  • +10,000 SFRU5 95.875/95.9375 call spd vs SFRQ5 97.00 calls, 1.25
  • 2,500 SFRN5 95.68/95.81 put spds, 0.75 ref 95.935
• Treasury Options:
  • 10,000 FVQ5 109/110 call spds ref 108-15.5
  • Over 26,000 TYQ5 112 calls, 32-40 (Decent volume yesterday: 84.2k pushed OI to 201,774)
  • +4,000 Mon wk 10Y 111.75 calls, 11 vs. 111-13.5/0.29%
  • +2,000 TYU5 108/109 put spds, 8 vs. 111-12.5/0.08%
  • -2,000 TYQ5 112.75 calls 19