The BOC Bank is widely anticipated to keep the interest rate unchanged at its upcoming rate decision on Wednesday. This would keep the interest rate differential between USD and CAD unchanged and allow the currency pair to fluctuate based on each country’s economic outlook. However, the recent strong jobs report in both the US and Canada throws a bit of a wrench into the outlook.
Canada surprisingly added 88K jobs in May, well above the 10K expected. The unemployment rate also fell to 6.6% from 6.9%. The general theme for Canada’s economy lately has been slow growth amid inflationary pressures from tariffs and energy costs. But the strong job numbers suggest that demand pressures could increase, which might translate into organic inflation. Previously, slow growth was a reason to expect the BOC to be dovish once energy or tariff issues were resolved. But if the economy is picking up, then the BOC might have to be more hawkish than anticipated.
What the Market Is Looking For
Given the strong consensus about the meeting, it’s unlikely a decision to hold rates will have an immediate impact on the currency. The focus will likely be on the guidance offered by Governor Tiff Macklem and the overall tone of the monetary policy statement.
Markets are currently expecting a cautious tone, largely emphasising uncertainty. He’ll likely acknowledge the improvement in the labour market, but still suggest there is a lot of slack in the economy, given the unemployment rate is well above the structural level. Essentially, it’s expected that the BOC’s tone will seek to balance economic slack against external price pressures (tariffs, crude prices).
What Could Surprise the Market
If Macklem doesn’t balance the messaging, markets could react to a perceived shift in tone. That could be both hawkish or dovish. A dovish surprise would include hints that the next move might be a cut, likely due to greater emphasis on the economy. If he dismisses the jobs number as a one-off or doesn’t mention the recent labour figures, markets might see it as a sign of bias towards easing. If concern over the economy is more prevalent than inflation, the CAD could weaken, particularly as markets are pricing in increasing odds that the Fed will hike next.
A hawkish surprise would include some indication that the BOC Bank might hike at some point. Current expectations are that the BOC will remain on hold for a long time, so a hike in the coming months would be a surprise. Macklem could achieve that by talking up the economic outlook and suggesting that current inflation is transitory.
Not Enough to Move the Needle, Yet
So far, the BOC has been cautious as it has faced a stagflation scenario with low growth and inflation driven by factors outside monetary policy. The recent jobs data is a sign that the economy might be about to recover, but it has been only one report so far. It could easily be an outlier and revert to the mean in the coming months.
As such, the situation likely hasn’t changed enough for the BOC Bank to adapt its outlook or for the market to price in a different rate trajectory. But if there is more confirmatory data down the line, that could change in the coming weeks and support the CAD.
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