The Bank of Canada decision is a close call but the market isn’t seeing it quite as a coin flip. Yesterday’s pricing was right at 50/50 on whether they hike by 25 basis points or not but today there’s more of a tilt towards waiting.
Current pricing is at 60% for no hike and 40% for a hike.
Despite the small skew, I think the FX market will move equally in either direction and I’d peg the knee-jerk around 60 pips. If they leave rates, that would boosted USD/CAD to around 1.3460, which would test the high of the week so far. A hike would knock the pair down to 1.3340 but I would be careful of chasing that lower. A hike — especially with a hawkish statement — would spark worries about a harder landing in Canada and, ultimately, a series of rapid rate cuts in 2024.
USDCAD 4 hour chart
From where I stand, I think the Bank of Canada should and will hold rates. Every month, the mortgage market progressively tightens and there’s plenty of reason to believe that inflation is falling. That said, a 25 bps hike would put a further stamp on that and wouldn’t materially move the needle in any direction but I don’t think it’s necessary.