The Canadian dollar is a bit of a puzzle today. One the surface, all the elements are in place for a big drop in the loonie but it's the second-best G10 performer today, trailing only the sizzling US dollar. And it's not trailing the dollar by much with USD/CAD only up 25 pips to 1.3154.
As the day has worn on, the US dollar has slowly ceeded ground to the loonie. The July 14 high of 1.3224 could be offering some resistance.
It's the start of a new month so some flows could be in play but there's also some justifiable focus on the Bank of Canada. The next decision is less than a week away on September 7 and the increasingly-hawkish mood from all global central banks is leading to more-aggressive pricing.
The implied odds of a 75 bps hike are up to 57%.
The most-recent BOC meeting was July 13 that featured a 100 bps hike. In the statement, the BOC appeared to signal a slower pace of hikes going forward.
With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today. The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation. Quantitative tightening continues and is complementing increases in the policy interest rate.
The market had settled around 50 basis points and there was even talk of a pause but with the Fed signaling more hikes, we could have the BOC at 3.25% next week.
At the same time, the Bank of Canada is never a sure thing. Tiff Macklem and the governing council don't feel any need to prepare markets and avoid volatility. It would be a bold move to deliver a dovish surprise at the moment -- even if it's still 50 bps -- but it's not outside of the playbook.
Also note that Macklem was at Jackson Hole last week, so he might have a good idea of how Fed Chair Jerome Powell sees inflation developing in the year ahead.
