There was little evidence of higher energy costs broadening to raise prices for other goods and services in Canada last month, with underlying inflation pressures holding steady, further lowering the likelihood of a rate hike from the Bank of Canada by year end. Data released by Statistics Canada this morning showed core inflation—which strips out food and energy prices—and is computed as the average of the two price measures now preferred by the central bank (trim and median), remaining unchanged in May from a month earlier, rising 2.1% on a year-over-year basis. On a headline all-items basis, prices increased 1.0% from May, pushing up by 3.2% over the same period last year, up from 2.8% in the prior month.

Demand-driven inflation remained practically non-existent. Price breadth narrowed, with costs rising by more than 3% across roughly a third of product categories, down from almost half in December. An update published on Friday showed retail sales growth in April was almost entirely driven by higher gasoline and fuel prices, with receipts flat in volume terms as consumers held spending steady in other categories.

The Canadian economy is growing well below potential as trade uncertainty persists, home prices correct lower, population growth slows, and the war in the Middle East clouds the outlook. Investment remains moribund, labour markets are weak, and consumer spending is soft, giving businesses little latitude to raise prices. Although officials at the Bank of Canada have warned they stand ready to counter a broadening in inflation pressures, they have also signalled the risk is relatively low, with Governor Macklem telling reporters he believes rates are where they need to be for now.

Amid a hawkish turn from US policymakers, two-year government bond spreads have widened against the loonie, and the exchange rate is plumbing a 14-month low, having fallen almost 3% this year.

This should be put in context, however: the euro, pound and yen have all weakened to a similar degree, suggesting that the greenback’s strength is overwhelming domestic fundamentals across the board—no matter how persuasive those fundamentals might be. Long positioning on the dollar is becoming overcrowded, technical indicators look stretched, and we are watching for a pullback in the near term—a pullback that could see the loonie eke out some modest gains.