What To Expect From BOC Tonight

If BoC shuns from assuring a rate hike next month, Long USD/CAD?

Bank of Canada (BOC) is expected to let rates remain unchanged tonight

BoC has raised rates 4 times since mid-2017 with the latest increase in July. The odds of a rate hike slipped from 23% to 20% after GDP data fell short of expectations, based on overnight index swaps market. Canada’s Q2 GDP came out at 2.9%. versus the expected 3.0%. This was the highest growth rate for Canada in four years, led by energy exports, which accelerated by 5.6%.

During the previous meeting in July, Governor Poloz stated that rates would need to further increase as the economy is in a good shape. Since then, we saw unemployment rate falling to a 4-decade low at 5.8% and headline inflation reached a 7-year high at 3.0%.

On the other hand, Canada manufacturing growth continues to slow with IHS Markit Canada Manufacturing Purchasing Managers’ index (PMI) dipping to a seasonally adjusted 56.8 last month. Furthermore, Canadian retail sales fell 0.2% in June, but May’s big jump was revised even higher thus the small decline does not shed light on whether it has slowed.

Last week, Canada failed to secure a trade deal with US. President Trump notified Congress on Friday that he planned to sign a deal with Mexico in 90 days and would include Canada if they are willing. The bad news is that the White House’s Friday deadline has been missed and given Prime Minister Trudeau’s optimism at the start of the week, it is clear that there are difficult issues that both countries don’t want to budge on. Negotiations are expected to resume today.

Trade tensions is still a major risk to the economy; Hence, Bank of Canada is wary of the consequences of having to reverse policy in midstream. All in all, we feel that BoC will remain positive, quoting stronger economic data but will not confirm an October rate hike until NAFTA deal has significant progress.

USD/CAD has broken up higher due to the strengthening of dollar. We feel that until there is meaningful progress in the trade talks between US and Canada, USD/CAD could rise higher. Do note that there is no speech from Governor Poloz tonight.