Bank of Canada Preview: On Hold Encore

While some 40 central banks have eased monetary policy this year, the bank will stand pat once again, although it's likely to maintain a cautious tone. How dovish that will be is the key question as Governor Poloz wasn’t shy about saying a rate cut was debated at the last meeting.

Dovish October meeting

At that time, the bank left the door open to a possible rate cut over the coming months. It lowered its domestic and global growth forecasts and said the current level of stimulus remained appropriate but noted that the country’s economy will “be increasingly tested as trade conflicts and uncertainty persist.”

The bank firmly stated that they would be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. The strength in employment and housing was somewhat overlooked, while trade risks and capex weakness were emphasised.

Resilient domestic economy

Fast forward five weeks and while the weakness in global and US growth has continued and trade poses an ongoing downside risk, the domestic economy is holding up. Inflation remains sticky around target and recent GDP data hit the bank’s forecast from October, with business investment strengthening quite sharply.

The bank said it would also pay close attention to the sources of resilience in the domestic economy, notably consumer spending and housing activity. So, look out for policymakers possibly commenting on the rebound in housing, especially due to the acceleration again in mortgage approvals.

What’s priced in?

Expectations remain very low for a rate cut with around a 6% chance of a 25bp move. Interestingly, the market is unsure about what happens after this – unchanged, one cut or two cuts are all equally possible in the first half of next year. The prospect of a January move has retreated recently from above 30% a week ago to nearer 20% now.

Market impact

CAD remains soft near recent lows against the USD and this may continue with seasonal pressures and tightness in year-end funding supporting the greenback. Near-term resistance comes in at 1.3327 but in the absence of any USD retracement, a move up to the long-term resistance in the mid/upper 1.33 zone is possible.

Any hint of a hawkish hold will see prices fall, with support around the 200d MA at 1.3280 and then minor trend support at 1.3250.