The market is smitten with today’s blockbuster Canadian jobs report but it looks like it has gotten ahead of itself.
The probability of a BOC rate hike at the June 5 meeting in the OIS market is up to 29% compared to 15% yesterday. The probability rises to 43% at the July 17 meting (32% prior) and 55% by the Sept 5 decision (44% prior) .
The June 5 decision is just over 3 weeks away and the Bank of Canada is not prone to surprises, especially when there are so many questions about Europe, growth in the United States and a potential slowdown in China.
Jobs data is backward looking and not that surprising since many people were talking about how unusually soft the numbers appeared early in the year.
The Canadian economy is just about the farthest thing from self-contained on the planet . It’s essentially a proxy for:
- Commodity prices
- US growth
- Worldwide growth
Those three things are tied together and the Bank of Canada won’t hike unless it feels confident about external growth. Granted, Carney has been jawboning about a housing bubble but he made it clear that the BOC won’t hike and hurt the rest of the economy just to keep a lid on house prices.
Canada is a solid economic harbor at the moment but it’s not an island and the same goes for CAD. There is room for relative outperformance against a similar economy like Australia but if Europe, the US or China take a turn for the worse, the loonie will tumble as the BOC heads to the sidelines.
