We're one week away from the June 5 Bank of Canada interest rate decision and it looks like it will be a tense one in the FX market. Right now the market is pricing in a 61% chance of a rate cut and a 39% chance of no change in the 5.00% overnight target.
If the BOC doesn't cut next week, the market sees it as a sure thing in July with 26 bps priced in for the following meeting.
For year-end, the market is priced for 50 bps in cuts.
Many are closely watching the Canadian housing market as it appeared to cool down after a strong start to spring. Some expect a wave of buyers to appear after a rate cut but would moving rates to 4.50% from 5.00% at year end really change the equation for buyers? It's a delicate picture and inventory is starting to build.
In terms of the upcoming BOC decision, on Friday we get Canadian GDP and that's the final notable release ahead of the decision.
My expectation is that we get a cut but if it comes with guidance from the BOC that they will be cautious in cutting further, then the downside in the loonie might be limited. That said, if the BOC falls behind the rate cutting curve, there could be considerable downside for the Canadian currency.
