BOC's policy divergence to support USD/CAD rates widening

A little market reaction is expected to the BOC announcement this week. Following stronger-than-expected Q2 GDP report, the market sees only a small chance of a September cut, especially given the absence of MPR and press-conference, which is consistent with our call. 

"Taking a longer-term view, however, ther is room for a further rally in the front end as the selloff in oil and other commodities since June may lead the Bank to revise growth projections lower and proceed with further policy easing. The continuation of CNY devaluation is expected later this year, which is likely to put further downward pressure on commodity prices", says Bank of America.

In contrast to Canadian rates, risks to front-end US rates are skewed toward a selloff, in our view. The market pushed out the perceived timing of the first Fed hike to Q1 2016,but our economists do not expect such a long delay given the tighter US labor market.

"Although the spread between 2y USD and CAD rates already trades at the upper bound of the historical range, it is likely to widen from the current levels if our view on the policy divergence is realized", added Bank of America.