Canadian Dollar: BoC on hold and hikes priced out – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports USD/CAD is consolidating losses after benign United States (US) Consumer Price Index (CPI) and Producer Price Index (PPI) data, with the Bank of Canada (BoC) leaving its policy rate unchanged at 2.25% for a sixth meeting. Updated BoC projections show core inflation near 2% and slowing Gross Domestic Product (GDP) growth, suggesting scope for markets to pare roughly 50 bps of priced tightening as Canada’s economy remains in excess supply.

Benign outlook tempers BoC tightening bets

"USD/CAD is consolidating this week’s losses triggered by the benign US June CPI and PPI inflation reports."

"As was widely expected, the Bank of Canada (BoC) left the policy rate on hold at 2.25% for a sixth straight meeting yesterday."

"The updated projections suggest the BoC is in no rush to start raising rates. Core inflation is seen averaging 2% y/y over Q3, and real GDP growth is projected to cool from an annualized pace of 2.5% q/q in Q2 to 1.5% in Q3."

"Bottom line, there is room for BoC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD as the Canadian economy remains in excess supply."

"Notably, the BoC may have taken a page from Fed Chair Kevin Warsh’s playbook and stepped back from forward guidance."