The Bank of Canada decision is on Wednesday and a 50 basis point hike is fully priced in.
CIBC thinks the market is right with 88% implied odds of another 50 bps hike on July 13 but then the BOC will be at 2.00% and won't get to the 2.78% implied by the OIS market by year end.
That's because the housing market is rapidly slowing.
"Large excess demand in Canada is much more concentrated in one area — housing. That also just happens to be the area of the economy that is the most sensitive to interest rate increases, and an area that recent home resale data suggests is already starting to slow from the 'exceptionally high' levels that the Bank of Canada described in its last policy statement."
They expect the BOC and Macklem to sound hawkish on Wednesday so there's no trade in fading CAD strength yet but will be watching commentary on housing closely.
"Any admission that the housing market is already responding to higher interest rates should also be seen as an admission that excess demand is about to become less excessive. That is one of the key reasons why we think that, after another 50bp hike in July, the pace of hikes will slow down, and the Bank won’t need to take rates any higher than the 2.5% mid-point of its neutral band.”
If/when the Bank of Canada disconnects from Fed rate hikes, there's potential downside in the loonie. I think we would be seeing that already if not for the incredible pricing in oil and gas; but that's something that looks increasingly likely to continue.
I spoke with BNNBloomberg yesterday about the Canadian dollar and Bank of Canada.