CAD: Different ball-game? - Rabobank

In view of Jane Foley Senior FX Strategist at Rabobank, the only surprising part of Wednesday’s 25 bps BoC rate hike was the timing as October had been favoured by economists for the policy announcement given that this would coincide with the publication of a new set of BoC forecasts. 

Key Quotes

“In the event, however, the recent spate of strong economic data proved to be sufficient to tip the scale in favour of an immediate move to 1.0%.  It seems that last week’s release of a stunning 4.5% q/q saar GDP growth rate in Q2 even surprised Bank officials.  The BoC commented that “recent economic data have been stronger than expected” which was “supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining”.” 

“Together with the 25 bp hike announced in July, the BoC has now taken back the 50 bps of easing that was provided in 2015 to cushion the blow of the oil price plunge.  Before the 2015 policy moves, the BoC main policy rate had been stable at 1.0% since 2010, which was 75 bps above its post crisis low.  There is no firm forward guidance given by the BoC beyond yesterday’s statement that “future monetary policy decisions are not predetermined and will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.”  Although a continuation of strong data will clearly lift the risk of more rate hike.  It remains possible to argue that the BoC could be far more cautious about raising rates going forward.”

“In its policy statement, the BoC made clear that “given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates”.  Any weakening in consumption demand suggest that current moderate CPI inflation levels are likely to persist for longer.” 

“Added to the uncertainty about the impact of higher rates on consumption are the prevailing doubts over the outlook for NAFTA and its potential impact on trade.  Round three of the negotiations between the US, Mexico and Canada will take place between Sep 23-27.  The US Trade Representative reaffirmed this week that “addressing the US trade deficit is a top priority in renegotiating NAFTA”.”  

“The CAD is holding most of its post-rate hike gains based on expectations of further BoC policy tightening going forward.  Although we see risk that the market may be over-anticipating the risk of rate hikes, the sluggish tone of the USD is likely to keep a lid on correction in USD/CAD nearterm.   Despite the improvement in some recent US activity data, the weakness of wage data will continue to supress expectations of another Fed rate hike this year.  Meanwhile, a lack of expectations in the market about the ability of the Trump Administration to deliver on tax reform continues to undermine the USD.  Although USD/CAD looks likely to hold around current levels in the near-term, we would expect the CAD to give up some ground into 2018 on anticipation that the BoC could disappoint with its rate hike trajectory.”