The Bank of Canada likes to keep the market guessing.
The Fed seems to think it has a solemn responsibility to never make an unexpected move but the BOC doesn't share that view, that's why we often get surprises and an uncertain market into rate decisions.
Today's 9:45 am ET announcement is no exception as the market is pricing in a 26% chance of a cut, with the remainder positioned for a hold.
The probabilities had favored a cut two weeks ago but Canadian inflation data ran hot and last week's GDP was the nail in the coffin at 2.2% vs 1.7% expected. Still, the trade is a big source of uncertainty in Canada and the housing market is struggling. The Toronto Real Estate Board today reported condo sales down 25% y/y and detached home sales down 10.6% y/y with prices 5-6% lower. In April-May combined, the sales of all homes were down 17.1% y/y and inventory continues to far outstrip sales.
So there is a case for a pre-emptive cut, though I would note that this report about a potential US-Canada trade deal has gotten surprisingly little attention. If a deal is struck, it would leave Canada in a plum position in terms of access to the US market and certainty on trade. It would be a big tailwind for the loonie and could leave the BOC sidelined for a more-extended period.
As it stands now, the market is expecting a 71% chance of a cut at the July 30 meeting and has priced in 42 bps of additional easing this year. I don't see the BOC offering a strong signal on what it will be doing next, so those numbers might not see a big swing.
However I will be watching for inflation commentary as prices have fallen back below 2%. I'll be interested to hear how sustainable that is from the BOC's perspective.
All told, I don't see big risks for the loonie today but if there is no move on rates then I expect some downside in USD/CAD as that 26% is priced out. With that, the level to watch will be 1.3672, which was last week's low and the lowest since October.
