Markets are on the lookout for when the BOC will cut rates next. Key to that decision is Tuesday’s CPI figures, which could confirm changes in expectations for monetary policy. The BOC has been particularly vague with its guidance lately, leaving the market to react to the data. This could mean there will be a stronger-than-normal move in the USDCAD when the figures are released.
The BOC’s target for inflation is within a band of 1-3%, and CPI has been near the top of that. However, the bias is still for easing, because Canada is being affected by the tariff war with the US. Unlike most other countries that have accepted the Trump Administration’s unilateral application of tariffs, Canada has retaliated. This has left traders worried that inflation could rise and prevent the BOC from easing.
When’s the Cut Coming?
The futures market is pricing in a rate cut in September, just before the Fed does the same. If this were to happen, then the interest rate pressures on the USDCAD would remain the same. The currency pair would then react to other economic pressures, particularly the price of crude. That is, unless Ottawa and Washington announce that a trade agreement has been reached before the BOC meets. That would likely have a bigger impact on the currency than even the central bank’s rate decision.
However, if the July inflation rate were to exceed the 3.0% top of the target band, then the market might move its bets for a rate cut to October. This would mean a difference in interest rates, especially if the Fed also cuts rates in October, as the market is currently expecting. While this might leave the CAD stronger in the very short term, higher rates would drag on the Canadian economy. Even with the expectation of lower rates providing some relief, the economy is still shaky. In the longer term, the Canadian dollar could suffer as weaker GDP saps investment interest in the country.
What to Look Out for
The Canadian July CPI change is expected to tick up to 2.0% from 1.9% prior. The core rate, on the other hand, is expected to be maintained at 2.7%. But the measure that the BOC pays the most attention to is the trimmed-mean rate, which is expected to stay at 3.0%. A beat by just one decimal would put it above the target range. Presumably, that would mean the BOC would be motivated to do something about it, such as not cutting rates at the next meeting.
On the other hand, from the minutes of the last meeting, it seems that the BOC’s main concern isn’t inflation. Instead, the majority of the statement was focused on the trade issue, as the central bank remains worried about slow economic growth. Even if tariffs cause a bump up in inflation, the lack of organic inflation from a sluggish economy could mean that inflation will undershoot. That’s one argument that can be made for cutting rates even with high inflation in the current circumstances.
Given that situation, some analysts might be looking closely at Canadian June retail sales figures that come out on Friday. Sales to consumers are expected to have rebounded to 1.6% growth from -1.1% prior. If that were the case, then inflationary pressures could be maintained. That would justify the BOC keeping rates elevated in September, potentially supporting the CAD in the meantime.
