CAD Volatility Expected Amid Hawkish Tone from Bank of Canada

The Bank of Canada kept its policy rate unchanged at 2.25% for the seventh consecutive meeting, but adopted a more hawkish tone as inflation risks rise due to higher energy prices and trade tensions with the US.

Governor Tiff Macklem stressed that inflation remains too high, and upside risks have increased due to the conflict in the Middle East and renewed escalation of the trade dispute with the US. Higher energy prices could increasingly spill over into other goods and services.

The Bank's tone is more hawkish as it expects higher energy prices to impact inflation, despite a recent welcome recovery in the labour market. Last month, nearly 75,000 new jobs were created, significantly more than expected, but the consensus for August's job creation is only an increase of 15,000.

The Canadian Dollar (CAD) performance may be influenced by today's Canadian jobs surprise, and it's likely to play a significant role in the short term. A labour market surprise to the upside could benefit the CAD, while weaker figures would not come as a surprise given Canada's recent labour market volatility.