The Bank of Canada is set to make its interest rate announcement tomorrow in an unusually tricky environment. Second quarter GDP growth in Canada was hugely and surprisingly disappointing. One reason is that export growth has stalled. Another seems to be that housing resale activity has slowed. At the same time, consumers are experiencing inflation not seen in several decades and whether or not you believe that it is transitory price pressure is irrelevant to the “sense” that things cost more. All of that is happening in the middle of a surprisingly close Federal election campaign. The overwhelming consensus is that the Bank of Canada will maintain the status quo in terms of rates and monetary policy. And while that is the likely outcome, such broad consensus always elevates the risk of volatility in response to even slight divergences from expectations. Still, it hard to imagine a hawkish statement from the Bank given that south of the border, the Fed has maintained a cautious tone in response to similar pressures. Today, the Canadian dollar is the weakest major and down 0.5% against the US dollar. USD to CAD is currently at 1.260 (CAD to USD at 0.794). Part of the reason for the weaker Canadian dollar is a broad uptick in USD in response to an uptick in US treasuries. But one has to imagine that the weakness in the Canadian dollar has more to do with the prevailing view that the Bank will follow the Fed and remain cautious in response to the emerging economic picture.
