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BoC Set to Keep Rates on Hold For Now Amid NAFTA Uncertainty

BoC Set to Keep Rates on Hold For Now Amid NAFTA Uncertainty

Justin McQueen, Strategist

CAD Analysis and Talking Points

  • BoC to Keep Rates at 1.50%
  • Focus on accompanying statement

The Bank of Canada will publish its latest interest rate decision at 1400GMT where the central bank is expected to maintain its policy rate at 1.50%, according to 19 out of the 20 surveyed economists (one calling for a 25bps hike). OIS (Overnight Index Swaps) markets also attach an 81% likelihood that the central bank will stand pat on interest rates. As such, focus will be on the accompanying monetary policy statement and whether the central bank provides a strong signal for another rate hike October, given that it is roughly 80% priced in.

BoC Set to Keep Rates on Hold For Now Amid NAFTA Uncertainty

Source: Thomson Reuters (BoC Interest Rate Expectations)

Positive Data Supports Additional Rate Hikes

Canadian data continues to support the view that additional rate hikes are necessary for the Canadian economy. Recent data showed that economic growth was at 2.9% for Q2, which was above the MPC’s forecast of 2.8%, alongside this, headline inflation is now at the top of the BoC’s 1-3% inflation target range. As such, it is likely that the BoC will remain upbeat regarding the Canadian economy.

Canadian Economic Data

Date

Latest

Expected

Verdict

CPI (June)

July 20th

2.5%

2.4%

Bullish

Retail Sales (May)

July 20th

2.2%

1.1%

Bullish

Core Retail Sales (May)

July 20th

1.7%

0.7%

Bullish

Trade Balance (Jun)

Aug 3rd

-0.63b

-2.3b

Bullish

Ivey PMI (Jul)

Aug 7th

56.7

65.1 (Prev.)

Bearish

Ivey PMI SA (Jul)

Aug 7th

61.8

63.1 (Prev.)

Bearish

Housing Starts (Jul)

Aug 9th

206.3k

219.5k

Bearish

Employment Change (Jul)

Aug 10th

54.1k

17k

Bullish

Unemployment Rate (Jul)

Aug 10th

5.8%

5.9%

Bullish

CPI (Jul)

Aug 17th

3%

2.5%

Bullish

Retail Sales (Jun)

Aug 22nd

-0.2%

-0.1%

Bearish

Core Retail Sales (Jun)

Aug 22nd

-0.1%

-0.1%

Neutral

GDP (Q2)

Aug 30th

2.9%

3%

Bearish

Source: DailyFX (UK Economic Data Since BoE’s May Meeting) *Please send feedback on table if helpful

NAFTA Presents Largest Risk

While economic data remains firms in Canada, a cause for concern for the Bank of Canada and the biggest risk to the economic outlook is the uncertainty on whether the US and Canada can forge a deal. Last week, both US and Canadian trade ministers had failed to reach an agreement in time, while President Trump had threatened to leave Canada out of NAFTA. Consequently, this may see the BoC deliver a somewhat cautious statement, which could see the Canadian Dollar falter as markets unwind bets for an October hike.

Trading the BoC

Given that market pricing is largely for an unchanged rate decision, the focus will be on the accompanying statement from the BoC. Market pricing for October is somewhat high at 80%, despite the uncertainty over NAFTA talks between the US and Canada with both nations failing to reach an agreement. As such, a cautious statement from the BoC highlighting the concerns over NAFTA could see a reduction in hawkish bets for October, which in turn could take USDCAD firm above 1.32. However, if the BoC remain upbeat given the healthy economic data and signal a rate move for October, this could see USDCAD revisit 1.31 yet again.

Option Pricing suggests that we could see some volatility over the event with vols indicating a break-even of 90pips.

USDCAD Price Chart: Daily Time-Frame (January-August-2018)

BoC Set to Keep Rates on Hold For Now Amid NAFTA Uncertainty

Chart by IG

Support: 1.3115(23.6% Fibonacci retracement), 1.31

Resistance: 1.3200, 1.3290 (July Highs), 1.33

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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