Bank of Canada Monetary Policy Preview – July 2015

The Bank of Canada meets later this evening during the US trading session and is expected to release its monetary policy statement at 1400 GMT. On the table is the speculation whether the Bank of Canada will deliver another rate or if it would keep interest rates unchanged. Of course, today’s event isn’t just a simple question of rate cuts but also takes into account the tone of the BoC’s statement. About an hour and 15 minutes later, at 1515 GMT, the BoC will also be holding a press conference which could bring additional volatility to the Canadian Dollar cross currency pairs.

Heading into today’s event, the bond market prices are currently expecting a 40% probability for a BoC rate cut by 25bps, to 0.5% from the current 0.75%.

Back in January this year, the Bank of Canada took everyone by surprise by announce a rate cut, bringing the benchmark Canadian interest rates down to 0.75% from 1% previously. Back then, BoC Governor, Stephen Poloz called the surprise rate cuts, ‘an insurance’ in light of falling Crude oil prices and the Canadian economy failing to lift off.

While the BoC left interest rates unchanged since then, today’s rate statement is likely to be a close call.

Canadian growth has been pretty much stagnant with the country’s GDP contracting at -0.6% on an annualized basis, led by falling Oil prices and the first quarter slowdown from the US economy. The BoC was initially confident that growth would bounce back during the second quarter of the year. But in reality the BoC missed its estimates or perhaps the Canadian economy could take a bit longer than estimated for the economy to bounce back.

While GDP has stalled, the Canadian labour market has managed to stay resilient with the Canadian economy adding close to 100k jobs in the first half of the year with close 140k in full time jobs. The pickup in the labour market has seen the household income rise at a gradual pace as well. Canadian unemployment rate has largely remained steady near the 6.8% – 6.9% region for close to three months after previously ticking lower to 6.6% in the first few months of this year. Core inflation for the country has remained steady near 2.2% on a monthly basis after peaking to 2.4% in the April.

Also, with the US economy slowly getting back on its feet, the Canadian economy could also start to see a rebound, considering the US makes up as the largest trading partner for Canada.

The Bank of Canada typically sets interest rates in months of January, April, July and October. Meaning that if the BoC stands pat on policy today, the markets will have to wait until October for any further monetary policy decisions.

The USDCAD has been flirting near the highs of 1.28, which on a technical level has proven to be a strong resistance in the near term. We could potentially expect a pullback from this resistance and there is a possible view that the technical analysis in USDCAD is pointing to the BoC standing pat on policy at this meeting.