Bank of Canada Decision: A Close Call with Hawkish Expectations

FX Daily: A close call on the Bank of Canada today

We expect a hawkish hold by the Bank of Canada today, but pressure on policymakers to hike has risen and it’s admittedly rather a close call. We don’t think it’s a make-or-break event for CAD – but we should keep an eye on the implications of a hike for the broader market and the dollar. In the CEE region, the main focus will be the NBP press conference.

 

USD: Lack of domestic factors

A quiet data calendar has left the pricing for the Federal Reserve's June meeting little changed, with a 20-25% implied probability of a hike after the soft ISM services figures on Monday. That and the generally supported environment for equities haven’t triggered any substantial dollar correction though.

 

The market’s bearish mood on European currencies remains the prevailing theme, and the dollar’s resilience probably denotes reluctance to add dollar shorts ahead of the US CPI risk event on 13th June – which is still seen as having the potential to tilt the balance to a hike the following day.

 

We think markets will watch the Bank of Canada decision (which we discuss in detail in the CAD section below) with great interest today. Following the Reserve Bank of Australia rate hike yesterday, another hawkish surprise from a developed central bank in the run-up to the FOMC meeting could cause the revamp of some hawkish speculation, especially considering Canada’s economic affinity with the US.

 

Given the lack of other market-moving events today, a BoC hike could end up supporting the USD too. But, as discussed in our BoC preview, we expect a hawkish hold – in which case the spill-over into the dollar may not be very material given that should be insufficient to prompt markets to price out the implied chances of a Fed June hike currently embedded in the USD curve.