Bank of Canada rate decision preview.

The Canadian dollar will rally if the Bank of Canada doesn't cut interest rates on Wed, March 4. The decision is at 10 am ET (1500 GMT).

In mid-February the OIS market priced a more-than 75% chance that BOC Governor Poloz would lower rates but better economic data and hints from policymakers have whittled that probability down to 24.5%.

What happened?

  1. Feb 24: Poloz says rate cut buys time to see how economy responds
  2. Feb 19: BOC Deputy Cote: Next decision will be based on careful examination of economy
  3. WTI crude is at $50 compared to $47 then (although the BOC assumes in its forecasts that crude will rise back to $60)
  4. Feb 26: Canada CPI 1.0% y/y vs 0.8% expected, core also higher
  5. Feb 6: Canadian January employment +34.5K vs +5.0K expected
  6. Nov retail sales were much stronger than expected
  7. March 3: Canadian Q4 GDP was stronger than forecast and Q3 revised higher

Unless Poloz was dead-set on a rate cut before this data, then I don't think it's going to happen. That said, the market is still pricing a significant chance of a cut.

Poloz doesn't know if he's going up or down

Economists are much more skeptical with only 5 of 23 economists polled by Bloomberg continuing to predict a cut.

The secondary (and perhaps larger) factor will be hints about what happens next. The probability of a cut at the subsequent meeting, on April 15, is 43% and that could rise or fall based on Poloz' comments. No matter what he does tomorrow, that will be a larger factor for the loonie in the hours after the release.

Also note that there is no press conference after the decision.

What's the forex trade?

The forex market is likely priced similarly to OIS so there is considerable money betting on cut. I don't think it's going to happen and I think the trade is a vanilla CAD-long position through the decision, with a 50-pip take-profit order.

In the case of a USD/CAD short, there is considerable support in the 1.2385 to 1.2353 range so take profits ahead of that. Another trade would be to wait for a break and ride a deeper correction down to 1.2050. I favor staying in that trade if Poloz hints that the BOC is done for the year or you believe oil prices will rebound.