Bank Of Canada To Hold Fire, But Not For Long

We expect the Bank of Canada to stay on hold on Wednesday, and that's the predominant market view. There's a case for a rate cut early next year though, due to global concerns. That should not be a significant drag on the currency, which should retain its rate advantage in the G10 space.

Bank of Canada Governor, Stephen Poloz

We still see a cut on the horizon

The Bank of Canada will probably leave interest rates unchanged at the upcoming meeting but don't entirely dismiss the risk of surprise action. Given the recently stated concern about the global backdrop, and the vulnerability of Canada to global demand and commodity price moves, we suspect it is only a matter of time before interest rates are cut again.

We suspect it's only a matter of time before interest rates are cut again

The Canadian economy is not immune to the global slowdown with the latest 3Q GDP growth rate (1.3 % annualized) underlining this point. Nonetheless, the story is one of relative resilience for now, as indicated by a firm jobs market with rising pay. With inflation broadly in line with target, we don't expect to see any policy change at tomorrow's meeting. 

However, faltering global demand and lingering trade uncertainty mean that officials are warning of the potential for weakness ahead. BoC officials have suggested that interest rates can do little more and they would be looking to see whether fiscal policy can provide a lift. We see limited chances of this coming to fruition in the near term. 

Moreover, with US-EU trade tensions on the rise and tariffs being reinstated in other countries, we see more risks ahead for global growth. Consequently, we suspect the BoC will reluctantly cut interest rates again in early 2020.

CAD will retain the best G10 carry

The Canadian dollar has remained anchored around the 1.33 level vs the USD in the past two weeks. It's likely to be a busy period ahead for CAD as investors will get information regarding the three key drivers of the currency:

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The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.  more

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