Pre-BoC meeting hawkish rhetoric from BoC members resulted in rates markets aggressively pricing in ~90% probability of two hikes by October and ignited a CAD rally. Governor Poloz emphasised the central banks shift in focus to addressing financial stability risks giving less weight to current inflation readings while remaining upbeat on an accelerating economic recovery with a closing output gap which should lead to higher wages and inflation. BoC are looking to take back excess accommodation in an attempt to cool a hot housing market. Governor Poloz and Deputy Governor Patterson also downplayed CAD bears primary arguments by acknowledging that:1. oil prices are low however,they have been catered for in central bank forecasts and 2. NAFTA is a risk but will be addressed when more information is known.
In line with market expectations the BoC hiked rates on Wednesday. The Governing Council (GC) acknowledged the comprehensive economic recovery noting the rate of job creation and positive business sentiment allowing the GC to conclude the output gap is expected to close by the end of the year. A more hawkish than expected tone resulted in further CAD strength.
Markets will be watching Canada’s CPI print on Friday. We are leaning towards a lower than expected read given last weeks soft US CPI figures and CAD CPI correlation with US CPI. If we see a soft print it is unlikely the BoC trajectory will change and we would use a CAD pullback as an opportunity to enter long CADJPY and short NZDCAD.