BOC to keep the rate at one ¾ percent in today’s meeting

We and the market expect the Bank of Canada will maintain its target for the overnight rate at one ¾ percent in today’s meeting. We focus on the Central Bank’s outlook for the local economy, inflation and language including a projection which will be published in the MPR. Mainly we focus on the Bank’s growth and inflation outlook. Turning to rate hike, we expect 1 to 2 hikes in 2019.

Policymakers mainly focus on the recent oil price drop, which has a character to open the downside risk to the economy. In today’s MPR the BOC will cut its inflation and growth forecast.

Currently, markets are pricing one hike in 2019. The first BOC meeting in 2019 (today) could reveal the further rate hike path. In case of a hawkish twist, CAD could strengthen further against the AUD, USD, and NZD as the hawkish tone is underpriced.

Here’s what analysts forecast:

  • ING noted “we expect two rate hikes in 1Q19 and 3Q19, taking the policy rate towards the lower end of the BoC’s estimate of the nominal neutral rate (2.5%-3.5%, based on at-target inflation).

The author James Smith also said, “We’re not ruling out a third hike next year either, depending on the strength of wage growth and if trade tensions remain in check.”

  • Wells Fargo said, “BoC hiking rates just twice this year rather than three times.”
  • Morgan Stanley is expecting a hawkish surprise. In a note to clients, MS reported “compared to the very low market expectations, we argue the risks to a hawkish surprise are rising. BoC rhetoric continues to emphasize that rates should gradually return to neutral (estimated to be 2.5-3.5% by the BoC). This would imply 3 to 7 additional rate hikes, compared to fewer than 1 implied by the market over the next two years.”.

FX: 

We continue to forecast USDCAD to head lower in the coming days. Last week we forecasted a top in USDCAD and the price has dropped 2.50% from our recorded price. We exit the view at 1.3240 and will look for another opportunity to return to a sell trade again.

Supports located at 1.3220/1.3200 its 50.0% fib reaction and 1.3170 its 100MA. The daily RSI is approaching oversold, but the oscillator is remaining bearish.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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