How the BOC is Ahead of the Curve

Welcome to the era of “serial disappointment”. That's the term the Bank of Canada coined to explain the persistent inability of developed economies to accelerate to a +3% growth pace. What makes the BOC unique is that it has abandoned the persistently optimistic projections unlike the Fed and others – it could be a taste of what's to come.  

On Wednesday, the loonie was the best performer as traders ignored the BOC hints that it will stay on hold for longer and focused on a change in language that eliminated the chance of a rate cut over the medium term. The New Zealand dollar was the laggard as the bearish scenario we outlined yesterday began to unfold on soft CPI numbers.

Listening to the BOC over the past few months it's clear that Poloz has grown skeptical of the models. Business conditions say companies should be investing but they've been saying the same thing in Canada since 2011 and the spending hasn't materialized.

Now the BOC has eliminated the wishy-washy language on rates and the statement says in plain language – we're in neutral. At the same time Poloz indicated they would remain in neutral until a strong and sustained phase of growth began along with business investment.

What puts the BOC ahead of the curve is that it has now built in deep skepticism into its outlook; it's an endorsement that the “New Normal” is real. It seems almost impossible to us that this would be a 'Canada-only' phenomenon. The country has tremendous advantages in finance, housing and natural resources but is stuck in neutral.

While the BOC now appears relatively dovish because it's essentially pledged to stay on the sidelines longer than the ECB, Fed and BOE, we have to consider that it's just the first in a long line of central banks that will come to the same conclusion about growth.

In the short-term outlook, the calendar is light in the Asia-Pacific region so the focus will be on the latest effort to break 1.3500 in EUR/USD. Yellen may have been dovish but the Beige Book was overwhelmingly positive and Fed hawks will continue to clamour for action. A break lower is almost inevitable, it's just a matter of getting the timing and trade right.