What to expect from the Bank of Canada
The Bank of Canada meets tomorrow to deliver a statement on rates. There is no MPR or press conference accompanying the decision but BOC Deputy Lynn Patterson will speak on Thursday to clarify policy.
The Canadian dollar has been under pressure since Friday's GDP report showed growth at an annualized pace of just 0.4% compared to 1.0% expected and the 1.3% BOC forecast.
Economists at TD highlight that the composition of the report doesn't bode well for Q1 with soft consumption and a large increase in inventories that's likely to unwind.
The market is pricing in virtually no chance of a move at the meeting but remains sympathetic to the BOC's hiking bias, with a 16% chance of a hike priced in for the July meeting.
The good recent news for the Canadian dollar is a rebound in oil prices but that's likely to be outweighed by other worries, according to TD.
" The communique is likely to have a dovish tilt to it, as the recent deterioration in economic data ought to outweigh the impact of higher oil prices," they write in a note.
However the market might have run too far already in expecting a clear shift. Instead, that could come in April when the MPR is released.
"Our base case is for the Bank to leave their forward looking language mostly unchanged, warning of higher policy rates over time subject to the evolution of the data, as we expect Poloz will want to have a full forecast in hand before a significant shift in communication," TD writes.
The key focus will be whether the BOC repeats or removes a line in the statement that says "the policy interest rate will need to rise over time into a neutral range to achieve the inflation target."
TD believes it will remain but with some qualifiers highlighting risks from housing and trade.
Within the statement, one phrase that rings particularly hollow is that "exports and non-energy investment are projected to grow solidly." The BOC had expected the resolution of NAFTA to spark a mini-boom but companies and consumers have instead moved to pay down debt.
As for the market, they see a risk of softness in Canadian bonds.
There has been a profound disconnect between the Bank's assessment of the economy and the market's since the collapse in energy prices late 2018. Whereas the Bank views the oil shock as a temporary set back, markets believed that it marked the end of the tightening cycle. Poloz's arguments to the contrary have not swayed markets yet, and we don't think one more trip to that well will convince markets to price in a material chance of a rate hike. We therefore do not expect to see much of a reaction in the rates space if the Bank delivers another cautiously upbeat outlook. Conversely, if the Bank capitulates and removes their hawkish forward guidance, we would expect to see another leg lower in Canadian rates with markets pricing in a slight chance of easing later this year.
Conversely, they say they like the risk/reward of selling USD/CAD near 1.34.
