Given the hawkishness of the BoC statement, our economists expect a follow-up rate hike of 25 bps at the 12 July meeting, bringing the policy rate to 5.0%. The market is currently priced for 15 bps of tightening at that meeting (Bloomberg, 29 June 2023), so there may be some modest upside for the CAD in terms of a knee-jerk reaction.

The issue for the market is what kind of guidance the BoC then offers for rates thereafter. We think that while the BoC will probably signal another ‘conditional pause’ after raising the policy rate to 5.0% in July, it is possible that 5.0% might not be the peak. With core CPI inflation still running at about 4%, and economic activity data exceeding expectations, the risks remain to the hawkish side for the BoC and the bullish side for the CAD over the near term.

If risk appetite becomes supportive, USD/CAD could challenge the resistance level of 1.30 over the near term.