Is BOC waiting for the Fed?

The sharp rise in oil prices off their lows over the past 10 days, better-than-expected Q2 GDP print, a second trade balance beat driven by strong non-energy exports likely reduces the risks of a September cut, as noted above.

"Combined with belief the Fed will begin normalizing this year policy divergence will continue to support our long USD/CAD stance. The high correlation between Canadian and US rates suggests that a Fed hike could lead to an unwanted tightening of Canadian financial conditions", says Bank of America.

A relatively neutral statement tone as a result of these developments would likely elicit knee-jerk CAD strength with USD/CAD still trading close to its recent highs despite the rebound in oil prices.

But, this move is faded as oil prices are still below the BoC's forecast assumptions and outlook for a strong pickup in non-energy exports and business investment is still quite optimistic, supporting our October cut call. 

"So even if the CAD weakens, the net effect will be more muted by the rise in Canadian rates, increasing the BoC's incentive to ease further. Bottom line, whether the Fed hikes in September or later, policy divergence still moves strongly in the dollar's favor as the BoC hikes again, supporting our higher USD/CAD conviction. We would fade any C$ strength on the back of a more neutral statement and no cut", added Bank of America.