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The Bank of Canada meets today in what is the first major release of the week. The meeting carries significant interest, as rate hike odds have surged quickly over the past month. On June 9, there was less than a 10% chance of a 25-bps rate hike at the upcoming July meeting; the day of the meeting, overnight index swaps are pricing in a 94% chance. During this timeframe, USD/CAD has depreciated by -4.6%. Needless to say, it appears that the rate hike itself is priced in.
Instead, focus should be on the tone in the policy statement. Choppy inflation readings below the BOC’s medium-term target, the slowest wage growth since 1990, and signs of the housing market bubble popping makes it unlikely that the BOC takes a hawkish tone. Without a hint that a second rate hike could come before the end of 2017, the Canadian Dollar could easily take a hit after the policy decision on Wednesday. Currently, OIS are pricing in a 65.5% chance of a second rate hike this year.
A hawkish BOC policy statement – one that highlights the upswing in growth (now +3.3% y/y) – could prove another lift for the Canadian Dollar. In this event, CAD/JPY is the preferred vehicle to trade (see video for technical details). Conversely, any sense of a ‘one-and-done’ rate hike could spook what is a clearly stretched currency in the near-term. A dovish policy statement that highlights the weak inflation environment (last print was +1.3% y/y) and the sharp downturn in urban housing markets in the past three months may mark the end of the Canadian Dollar surge. In this event, USD/CAD is the preferred vehicle to trade (see video for technical details).
Elsewhere, also at 10 EDT/14 GMT when the BOC rate decision is released, Fed Chair Janet Yellen will be making her semi-annual trek to Capitol Hill for the first of two days of testimony in front of Congressional panels. Fed Chair Yellen is likely to retain a relatively hawkish view given signs of sturdy domestic demand, a tightening labor market, and the belief that the mid-year lull in inflation readings is merely transitory.
