BoC expected to raise rates by 25 bp - BBH

The Bank of Canada is widely expected to raise rates by 25 bp today as the senior officials appear to have engaged in a month-long campaign to prepare the market, according to the research team at BBH.  

Key Quotes

“Many observers are trying to assess what changed for officials that they have been aggressive in pushing from easing at the beginning of the year to neutral at the start of Q2 to a sense of urgency now.”

“We see many considerations pushing in the same direction, including a judgment that the risks emanating from the US had appeared to lessen.  US growth was not as poor in Q1 as it had initially appeared, and the rhetoric and threat of a trade war also seemed to diminish.    Also, there does appear to be a synchronous expansion underway, reducing the global risks.  And all this in a backdrop of stronger Canadian economic data and the likelihood that the output gap is closed sooner than previously projected.”

“After posting strong gains at the end of last week after the employment data removed the last potential obstacle (some thought) to today's rate hike, the Canadian dollar has been sold a bit so far this week and is off about 0.4%.  That makes it the second worst major performer this week behind the New Zealand dollar, which is off 0.65%.  We also note that speculators in the futures market are net short Canadian dollars but net long the Australian and New Zealand dollars.  That said, the Canadian dollar has come a long way over the past two months (~6.5%), and the technical indicators warn that while there may be another test higher, the risk is for a deeper correction that lifts the greenback the CAD1.3000-CAD1.3020 area.”