Given the solid pick up in the Canadian economy the likelihood that the Bank of Canada rises interest rates by 25bp Sept 6th policy meeting has increase significantly. Exemplified by the strong 2Q GDP report, which indicated at 4.5% growth rate, the economy has expanded past the BoC projections. Improvement in the labor markets and housing suggest that inflation will further build. The Canadian economy has been expanding at an accelerating pace, forcing committee members to overlook current subdued inflation reading and adjust monetary policy today. Rather then, get caught behind the curve.
Risk in CAD are now asymmetrical as a no change but upbeat communicators will support CAD downside (keeping rate hike by year-end intact). However, a hike will indicate the BoC commitment, raising the markets expectations for additional BoC tightening. BoC interest rate expectations and yields spreads favoring Canada has been a driver of CAD pricing rather than crude prices. A hike would bring in short-end yields and propel CAD higher against the USD.
By Peter Rosenstreich