RBC economists Nathan Janzen and Abbey Xu said the Bank of Canada\u2019s Q2 Business Outlook Survey is set to gauge how firms responded to recent energy price swings after West Texas Intermediate previously traded near US$100. Responses were likely gathered largely in May, when WTI averaged just under US$100 a barrel, compared with under US$70 a barrel more recently. The survey will be scanned for any widening in inflation pressures, while longer-term inflation expectations are expected to stay anchored close to the BoC\u2019s 2% target.<\/p>\n
The release is also expected to shed light on expected sales, employment and business investment intentions, after those measures improved in Q1. Separately, May trade figures due Tuesday are forecast to show exports rising 0.6%, easing from 1.6% in April, while imports are expected to slip 0.8%. Softer energy price growth in May is expected to temper the energy trade balance, and weaker motor vehicle shipments point to some cooling in auto trade.<\/p>\n
We are focusing on the upcoming Bank of Canada Q2 Business Outlook Survey. This report is critical because it captures sentiment from May when WTI crude oil was trading near $98 a barrel. This is a major contrast to the current market where oil has fallen to around $68.<\/p>\n
The key question for us is whether that temporary oil spike caused businesses to raise their short-term inflation forecasts. While we expect longer-term expectations to stay anchored around 2%, any surprisingly hawkish tone from businesses could complicate the Bank of Canada’s path. With Canada’s latest CPI inflation data holding at 2.5%, the Bank already has a reason to be patient before cutting rates from the current 4.25%.<\/p>\n
This creates an opportunity in options based on Canadian interest rate futures. The market is pricing in a strong likelihood of a rate cut in the next quarter, but a robust business survey could easily push that timeline back. We see value in positions that would profit from the Bank of Canada holding rates steady for longer than currently expected.<\/p>\n
We are also watching the Canadian dollar closely. If the business outlook is stronger than anticipated and rate cut bets are reduced, the loonie should strengthen against the US dollar from its current level around 1.37. Therefore, we are considering short-term call options on the CAD to capitalize on a potential shift in sentiment.<\/p>\n
We\u2019ve seen this before, like during the 2014-2015 oil price collapse, where the Bank of Canada acted decisively in response to energy shocks. Tomorrow’s May trade data will be another data point, but we believe the survey will have a larger market impact. We will be looking for any signs of weakness in exports that would reinforce the case for a more cautious central bank.<\/p>\n\n\n\n