The base case

No change in rates or asset purchases. Remember that at the last meeting the BoC changed their asset purchases from $4 bln per week to $4 bln per week. Further adjustments were expected to be outcome-based and after the last meeting jobs took a fall in Canada. However, the reason for the jobs fall was the return to lockdown measures. Job postings still remain robust. Bloomberg notes strong job openings through May and note at restrictions on in-person activity is set to ease later in June. Furthermore, stay ay home orders in Ontario are lifting.

  • QE pace is expected to be further reduced in July with an outside chance of the following meeting. So, any taper of bonds at this meeting would be a bullish twist and USDCAD weakness out of the release.
  • Around inflation, the BoC may recognise the near term upside pressures. The BoC see a fall below 2% in 2022 as companies operate with the reduced demand due to COVID-19, but a return to 2% in the second half of 2022. This is an area to watch as the rise in commodity prices could see a revision to this inflationary forecast. This also could represent a bullish twist, but watch for the language about what the BoC will do regarding any inflationary pressure. They may explicitly decide to ignore it for example.
  • The bottom line is that the last two weak jobs reports will keep the BoC on hold for now and the first-rate hike is more likely to be reasonably anticipated in 2023. December 2023 futures are pricing in around five 25 bps rate hikes which is two more hikes than is expected for the Fed.

What’s the trade?

  • Any bond tapering is a CAD buy. CADJPY long or USDCAD short are worth considering.
  • Any concern expressed about CAD strength and dovish language and a USDCAD long would probably be best as the USDCAD pair is quite well extended to the downside.
  • Any interest rate projections brought forward will be CAD bullish as it will be a further signal of the BoC exiting easy monetary policy.