Bank of Canada preview: On hold with an ease at hand

It is expected Bank of Canada will hold rates at 0.75%, but take a dovish stance, leaving the door open to an ease later this year. Rates are roughly fairly priced going into the BOC meeting, but we continue to like curve steepens as a long-term trade. Risks are skewed towards C$ strength with FX pricing a 30% chance of a cut, but a dovish tone will make C$ strength fade, says BofA Merrill Lynch.

The question of whether the Bank of Canada (BoC) will cut rates at the July meeting, is a question of whether Governor Stephen Poloz and his team are ready to abandon their assertions that the Canadian economy is set for a solid recovery later this year. Data in 1Q and 2Q have been very weak, but the BoC has indicated that the economic fallout from the oil shock would be difficult to measure, and has instead put emphasis on the outlook for a recovery in 2H.

In that vein, the BoC, may not yet be ready to take action on the interest rate just yet. But, it is believed it will cut growth forecasts sharply with 2015 GDP growth downgraded to around 1.3% from 1.9% in the Monetary Policy Report, more in line with consensus and the forecasts. The BoC will also likely frame the recent data deterioration as a vindication of the unexpected rate cut in January, keeping rates on hold to buy time for signs of improvement. But when it becomes apparent that a robust pick-up in 2H is not materializing, the BoC will likely ease later this year, probably in October, notes BofA Merrill Lynch.