Synopsis:

Goldman Sachs sees the upcoming Bank of Canada (BoC) meeting as a close call. Despite firm inflation data in May and June, a July rate cut remains the base case for their economists. However, the actual odds of a cut may be lower than market pricing suggests. The decision between easing in July or September is finely balanced, and the outcome could significantly impact USD/CAD.

Key Points:

• Inflation Data:

  • Recent Firmness: May and June CPI reports have shown firm inflation, with inflation closer to 3% on a 3-month annualized basis.
  • In Line with Projections: Despite the firm data, inflation has been broadly in line with the latest Monetary Policy Report (MPR) projections.

• BoC Meeting Outlook:

  • Base Case: Goldman Sachs economists’ base case is for a July rate cut, though they acknowledge the challenging backdrop due to recent inflation data.
  • Market Pricing: The market is pricing in close to 20bps for a July cut, but Goldman Sachs argues that the actual odds are lower.
  • Balancing Act: The decision between easing in July or September is delicate, with a possibility that the BoC might prefer a cautious approach and cut at a slower pace.

• Potential Outcomes:

  • July Cut: If the BoC cuts rates in July, it could indicate a more dovish reaction function and support further upside in USD/CAD, especially if Fed officials remain cautious about cuts.
  • Hold Decision: If the BoC decides to hold rates, it would likely disappoint markets in the short run. However, if the BoC retains its easing bias and signals encouragement from recent data, it would not significantly alter Goldman Sachs' cautious view on CAD.

Conclusion:

Goldman Sachs sees the upcoming BoC meeting as a close call, with recent inflation data complicating the decision for a July rate cut. While a cut remains their base case, the actual odds may be lower than market expectations. The outcome of the meeting will be crucial for USD/CAD, with a rate cut potentially supporting further upside in the pair, while a hold could disappoint markets but maintain a cautious outlook on CAD if the easing bias is retained.