Intraday Market Thoughts

Finding the Bank of Canada Bias

by Adam Button
Apr 18, 2018 10:17

Today's Bank of Canada decision on interest rates (10:00 Eastern, 15:00 London/BST) could be a signal that stretches beyond Canada. The loonie was the top performer Tuesday in anticipation of a hawkish move while the Swiss franc lagged. The latest video for Premium subscribers below highlights this week's trade action on CAD.

The loonie has been the hottest currency this month as NAFTA negotiations improve but it will be BOC Governor Poloz in the spotlight on Wednesday at 1400 GMT with a tricky decision to make.

The latest Canadian inflation and jobs numbers were good but other data has been soft, especially housing figures, jobs and inflation reports lately may have been skewed by minimum wage hikes. In addition, the BOC is inclined to play it safe on NAFTA until the smoke clears.

That leaves the market pricing in about an 18% chance of a hike, which is probably higher than what it should be, but it reflects Poloz's recent flair for the dramatic.

In his most-recent comments a month ago, Poloz said the BOC was obliged to allow some capacity building occur and that more workers could enter the economy. That indicates he wants to wait and see before making any decisions. Yet, the timetable may have been moved up by last week's BOC business outlook survey. It showed far more firms expecting price hikes in the year ahead along with a blockbuster year for US demand.

Assuming rates are left unchanged, the first thing to look for is the central bank's revisions for GDP growth and inflation. This will shape up market's pricing for the June meeting. That's when the market is evenly split in the hike/no hike camps.

So the BOC is left with the decision to wait and see if its upbeat predictions materialize or to wait for hard evidence first. Sound familiar? That's the predicament that virtually every major central bank is facing, at least to some extent. At the moment, most are in the 'hike now' camp but economic data this year has been roundly disappointing and a shift towards patience from the BOC could be a sign of things to come.


Latest IMTs