So far, the central banks of commodity currencies have been going in opposite directions. On the one side was the RBA, which kept rates steady despite high inflation. The Australian market was seen as more vulnerable to disruption from the banking sector, and growth has been sluggish.

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At the other end of the spectrum was the RBNZ which did a “double” hike, surprising the markets. The focus there was on getting inflation down and dealing with runaway housing prices that were already a problem before the pandemic.

The common thread

What both of those rate decisions have in common is something missing: The impact of commodities. Consumer goods exports to China are the main source of income for New Zealand, while sales of iron ore in particular among other minerals drives the Aussie. China’s less than stellar economic growth figures over the last couple of months have put a crimp on expectations of commodity strength thanks to Chinese demand.

Where Canada stands out is that its main export commodity goes to the US. Commodity prices in general have been upbeat thanks to expectations of a weaker dollar as the Fed is seen easing up on the hiking despite still high inflation. But crude prices can be subject to more political influences, which can make predicting what happens with the CAD a little more challenging.

Getting a handle on the BOC

The price of the Canadian dollar has a larger impact on inflation in the country due to how much it imports, particularly from the US. A stronger CAD makes things difficult for Canadian exporters but helps reduce inflation. The recent rise in crude prices due to OPEC+ cutting back production in May has helped give a boost to the loonie. Which in turn gives a helping hand to the BOC, in bringing down inflation without having to raise rates.

This could help offset the series of data points that might have otherwise weighted in favor of raising rates. For example, the tightening in the labor market which could continue to contribute to inflationary pressures. And the economy has been doing better than anticipated by the BOC.

What to expect

The consensus is that the BOC will essentially repeat what it did at the last meeting in January, when it announced a “conditional” pause. That is, maintain the rate at 4.5%, and suggest that rates will stay at that level if conditions justify it.

After all, while inflation has been coming down, it hasn’t reverted to the target level. Additionally, going back to the reliance on imports from the US as mentioned previously, inflation does spill across the border. If the Fed does slow down rate hikes, and prices return to the upside in the US, the BOC might have to end its pause sometime in the future.

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