Loonie Soars as BoC Hikes Probability of Rate Hike

The Bank of Canada (BoC) held its interest rate at 2.25% for a seventh consecutive meeting, rewriting its statement to remove language suggesting that a hike was imminent. The move came as the country's unemployment rate dropped to 6.4%, breaking out of a range that had been predicted by the BoC since last year.

The Loonie has already begun to react to the news, with USD/CAD falling to just under 1.3800, more than 3% off its peak in July. However, economists are warning that Friday's Labour Force Survey (LFS) could be a crucial test of the BoC's claims that the labour market remains subdued.

The BoC has argued that conditions have improved, but demand for labour is still subdued and excess supply persists. However, the data suggests that hiring is actually outpacing the growth in the labour force, which has stopped increasing in size. This could be a sign that the economy is tightening, making it more likely that the BoC will raise interest rates.

The timing of Friday's LFS release is also significant, as it comes just hours after the US Nonfarm Payrolls (NFP) data is released. The Fed meets on September 16, and economists are pricing in a 50% chance of a quarter-point hike at that meeting. A strong print could raise the bar for the BoC to justify a hold, making it more hawkish than a weak print would have been.