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What the heck is a “dovish hike” and why are market players expecting it from the Bank of Canada (BOC)?

Here are points you need to know before trading the BOC’s statement tomorrow at 2:00 pm GMT!

What happened last time?

Governor Poloz and his team last met in May and back then they kept their interest rates steady at 1.25% as many had expected.

The BOC still has a hiking bias, though. Moreover, the BOC changed the language in its official press statement to sound even more hawkish.

And for comparison purposes, this is the BOC’s forward guidance during the April 18 BOC statement (emphasis mine).

“Some progress has been made on the key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth. This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

Now here’s the BOC’s forward guidance during the May 30 BOC statement (emphasis mine).

Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data.”

The BOC also retained its optimistic outlook and even gave a positive assessment of the Canadian economy, noting that “Activity in the first quarter appears to have been a little stronger than projected.”

How did the Loonie react?

The BOC stated that the Canadian economy is evolving within the BOC’s expectations or better. And since the BOC omitted the phrase “some monetary policy accommodation will still be needed,” the BOC therefore very heavily implied that if economic conditions continue to meet or beat the BOC’s expectations, then a rate hike will likely be warranted.

And that apparently excited the rate hike junkies, causing the Loonie to surge.

CAD 1-Hour Forex Chart
CAD 1-Hour Forex Chart

However, oil prices later began to slump, so the Loonie’s rally quickly lost steam and the Loonie even began to weaken on most pairs later.

What are traders expecting this time?

A quick look at forex calendars tells us that market geeks are expecting a rate hike to 1.50% this week.

And why not? Canada’s jobs market is on a roll, with labor force showing its fastest increase in six years and the economy adding a net of 31,800 jobs in June.

Annualized inflation also stayed above 2.0% for a fourth straight month in May, which is right around the BOC’s target range.

Moreover, Poloz said during the Q&A portion of his June 27 speech that (emphasis mine):

“It might be worth reminding you that data point for the first quarter, was exactly, to the decimal point, exactly what we forecast in the April MPR (Monetary Policy Report), which is quite reassuring in the sense that underlying appears to be correct. And inflation is exactly on target as we expected.”

Given where the economy is we are in a situation where the economy will warrant higher interest rates. We will ensure that is a gradual process.”

Before you buy the Loonie like there’s no tomorrow, though, you should note that BOC members might not be too hawkish even if they do raise their rates this week.

In his June 27 speech, Poloz cited new guidelines for mortgage lending and its impact on the housing market; the tricky relationship of higher household debt to higher interest rates, and the uncertainty around the U.S.’ latest tariffs and other countries’ retaliatory measures as issues that they still need to consider in their policy biases.

Does this mean that this week’s release will be a non-event?

Not necessarily.

For one thing, we’ll also see BOC’s quarterly monetary policy projections at the same time as the statement. In addition to that, top boss Poloz himself will conduct a presser roughly an hour after the statement.

Make sure you keep your eyes peeled for clues on the central bank’s future biases as well as any changes to their quarterly projections!

Oh, and watch crude oil’s price action, too! You never know when its catalysts turn out to be bigger movers for the Loonie than the BOC’s statement!