The Bank of Canada is not expected to adjust monetary policy at its upcoming September rates meeting later today with rates forecast to stay on hold at 1.5%. However, while no adjustment is forecast, traders will still be paying close attention to this meeting as the market looks to gauge the likelihood of any further rate hikes this year. Back in July when the bank last hiked rates, the BoC said that further rate hikes would likely be necessary given the momentum in the economy and traders will be keen to see if the bank reiterates that message this time around.
While two consecutive rate hikes would certainly not be out of character, given that we saw such adjustments last year, the market is currently expecting the next hike to come in October given the recent weakness in 2Q GDP which undershot expectations to print 2.9%.
Strong Inflation Keeps BoC on Course
Despite the weakness in growth, the BoC remains bolstered by strong inflation data with CPI continuing to rise. Indeed, July’s reading hit the upper bound of the BoC’s 2% – 3% range causing a sharp upward repricing in rates. However, the BoC governor was quick to calm the market saying that “our measures of core inflation, which extract all the noise from the data, are all right around two percent – so, very close to target”. Essentially, Poloz was acted quickly to cap any speculative buying in CAD which could cause excessive strengthening of the currency by highlighting that the less volatile reading was showing a far more tempered rise than the headline figure.
NAFTA Remains Key
Adding further encouragement is the latest development within NAFTA negotiations as Canada re-joined the talks following Mexico agreeing on a deal with the US. However, after the talks concluded on August 31st without an agreement being struck, Trump took to Twitter to pour cold water on optimism surrounding the deal. One such tweet claimed that there is “no political necessity to keep Canada in the new NAFTA deal”.
Uncertainty surrounding NAFTA negotiations had been one of the key causes for concern regarding the BoC’s outlook earlier in the year and with the deal, seemingly on the line, this could be a driver for the repricing of the BoC rate path. However, it is worth considering that political leaders and the market alike are growing used to Trump’s tactics and such public commentary is viewed as a negotiating tactic more than a serious threat. With this in mind, unless talks officially break down and Canada is kept out of a new deal, the BoC’s currently outlook remains valid.
The base case for this month’s meeting then is a for a “hawkish hold” with the BoC keeping rates unchanged but signaling its intention to raise rates further in Q3 encouraged by strong exports, a stabilization in market rates along with firm inflation. Such a message should fuel some further USDCAD selling.
Alternatively, the bank might opt for a “dovish hold” as it focuses on ongoing issues within the housing market and the need to keep rates steady. If the bank keeps rates unchanged without giving a signal that a hike is forthcoming in October we are likely to see a pop higher in USDCAD as CAD traders unwind their long positions.
USDCAD is now rallying out of what looks like a bull flag formation within the broader bullish trend that we’ve seen over the last eighteen months. The key level to watch will be a test of the year to date high around 1.3376 which if broken will pave the way for a more explosive move higher bringing the 2016 high of 1.3801 into focus which is also the completion of a seven-wave symmetry pattern.