Bank of Canada to cut the overnight rate by 25bp

Tonight we get the much anticipated BoC policy decision and MPR, where a 25bp cut to the overnight rate (to 0.50%) is expected. The disappointing Q2 data we have seen so far points to another quarter without any growth, which suggests a much later closure of the output gap. On top of that, there is no clear evidence of the rotation in growth toward non-energy exports and capex. 

Having said that, BoC officials have not yet messaged a dovish shift in their outlook, and that has left expectations around this decision the most finely balanced in recent memory. The market implied probability of a cut tonight has hovered around 40-50% over the past week. 

For CAD, that suggests a sharp immediate reaction whether the Bank cuts or not. However, the two most likely scenarios-that they cut and leave a soft dovish bias, or don't cut and leave a very strong signal that they will likely do so soon-suggest an asymmetric risk lower for the currency. That is to say, a cut should see USD/CAD decently and sustainably higher, while no cut with a strong dovish signal would likely see a smaller dip that does not last long.