The Bank of Canada rate decision is coming up at 10:00 am ET and economists are leaning towards a 50 bps hike to 4.25%. Meanwhile. the OIS market is pricing in a 62% chance of just 25 bps.
Where there's convergence is around the top, which most believe will be at 4.25%. So that will either be a dovish 50 bps hike now that indicates a pause in January or 25 bps now and another 25 bps in January.
In either scenario, the language will be just as important to how the market reacts as the decision itself.
Bank of Canada guidance has indicated a hike is coming but has been coy on the size.
“We've signalled very clearly that we expect rates will need to rise further,” Macklem said in October. “And that could mean another bigger than normal increase, it could mean that we can move to a more normal size, 25-basis-point increases.”
Most recently, economic data has been strong with unemployment falling to 5.1% in November compared to 5.3% expected. Q3 GDP also surprised at +2.9% vs +1.5% anticipated.
At the same time, Macklem said he expects growth to 'stall in the next few quarters' and the much of the pain from prior hikes is already in the pipeline. Adding to it is a decline in Canadian home prices that's nearing 30% from the February peak in many markets. Canadians also hold a high proportion of variable-rate mortgages and that will be a direct hit to consumer spending.
Overall, I think the consensus has this one right and than 50 bps won't be seen as hawkish so long as it includes a clear nod to a pause afterwards. There isn't a press conference after the decision today but deputy Sharon Kozicki has a scheduled speech for tomorrow to clear up and misconceptions.
In terms of a trade, there may be an opportunity to fade a CAD jump on a dovish 50 bps hike.
