Overview: The Bank of Canada meeting is the first of today’s keenly awaited central bank meetings. With the direction of monetary policy abundantly clear, today’s meeting is merely about the timing of rate lift-off, the question being, do the BoC hike today or at its next meeting.

What Is Priced In?: As it stands, the economists polled by Reuters show 7/31 in favour of a hike, which to me is somewhat surprising and I would argue it is more of a 50/50 call. Perhaps the poll is suffering from outdated forecasts. On the flip side, money markets are far more conclusive, attaching an 80% probability of a 25bps hike at today’s meeting. In turn, this sets up for decent two-way price action, although, I would expect a larger move should the BoC refrain from pulling the trigger today, given that the outlook for monetary tightening tilts on the aggressive side with 6 hikes priced in.

Source: Refinitiv, DailyFX

Economic Data: In recent week’s Canadian data has come in hot, with the jobs market remaining robust with employment at record levels and is now up by 240k vs pre-pandemic levels. Meanwhile, headline inflation hit a 30yr high in 1991, while according to the Business Outlook Survey, two-thirds of firms now expect inflation to be above 3% over the next two years. As such, this does give the BoC enough ammo to pull the trigger today, which is despite the fact that at the last meeting, they stuck with the guidance that they will maintain rates until economic slack is absorbed in the middle quarters (Q2/Q3).

Sticking With Unchanged: Perhaps I should take more of a Bayesian approach in light of the recent run of robust economic data and expect a rate hike at today’s meeting. However, my view is that they shift their guidance to see slack absorbed in Q1, in other words, project a March hike. The rationale behind this is that, while data has been strong, Canada has been under strict lockdown measures over the last month in response to the spread of the Omicron variant, therefore, providing a chance (a slim one) that the Bank opt to hold off on raising rates today.

Taking a look at the BoC’s MPR assumptions, the central bank based its assumptions on Brent and WTI at $80/bbl and $75/bbl respectively. As such, given that oil prices are notably firmer relative to the BoC's assumptions, this would further support calls for a rate hike.

MPR October Assumptions Vs. Current Price

• Brent close to $80 (Currently $88)
• WTI close to $75 (Currently $86)
• WCS close to $65 (Currently $72)

Market Reaction: According to the option markets, the implied move for USD/CAD is 78pips, while in terms of positioning, traders have flipped net long CAD for the first time since November. In turn, this raises the asymmetrical risks against the CAD, should the BoC choose not to hike today. That being said, given how close this decision is, a hike today could quite conceivably see USD/CAD test 1.2500. To add to this, the focus in the press conference will be whether the Governor sheds much light on the aggressive market pricing further out the curve, which could prompt a reversal in an initial rate hike fuelled bid in the Canadian Dollar.

Traders Flip to CAD Long Heading into BoC Meeting