Bank of Canada likely to postpone a rate cut on Wednesday – Forex News Preview

Christina Parthenidou, XM Investment Research Desk

The trade environment is not friendly for the Canadian economy and therefore for the loonie at the moment but the Bank of Canada will likely decide to stand pat on interest rates when it meets on Wednesday at 15:00 GMT as some encouraging signs from the domestic economy allow the Bank to postpone the decision for now. November’s employment report could come to justify any rate cut delay on Friday at 13:30 GMT.

It’s not time for a rate cut

Back in October, the Bank of Canada, which has yet to start its easing phase, signaled that a rate cut by the end of the year could be possible amid the nonstop US-China trade war that keeps harming the export-oriented economy. However, a month later, BoC governor Stephen Poloz, managed to push the odds for a rate reduction in December significantly lower by stating that Canada’s monetary conditions are “just right” and Canada is still relatively in good shape to mitigate any negative storms from external markets.

Following that statement, GDP growth readings for the third quarter further boosted optimism that there will be no immediate call for a 25bps rate cut this month. Even though expansion inched down to a 1.3% quarterly annualized rate in Q3 as markets anticipated, the details of the report surprisingly revealed that business investment more than offset the 7.0% decline in the previous quarter by bouncing up by 9.5%. Moreover, residential construction strengthened by 13.3% while consumer spending also remained in positive territory.

While overall a slower GDP growth print that lies around the central bank’s annual growth forecasts increases the risk for the BoC to miss its growth targets by the end of the year as external risks remain well intact, the improvement in the above domestic measures hints that the export-dependent Canadian economy is still relatively resilient to any drag from a weakening global economy with the current interest rates.

Friday’s employment figures for November are expected to relay the message that a rate cut could be postponed into next year if the numbers show a positive employment growth of 10k versus the 1.8k decline in October. The fact that headline inflation is near the BoC 2.0% midpoint target unlike other major economies which are far from reaching their price goals, is another advantage that allows the BoC to stand pat on interest rates for now.

BoC may not hold pat for long

Nevertheless, with the US and China being reluctant to roll back existing tariffs and agree on terms that are included in the simpler “phase one” of the trade deal, speculation is rising that the two sides may not be able to sign the deal before the December 15th deadline when new US import tariffs against China are likely to come into effect. Of course, the US president could avoid imposing fresh tariffs this month to keep negotiations moving forward, but additional delays to secure a deal in this first phase of trade talks could further discourage investment plans and harm Canadian exports. Hence, BoC policymakers may not have the luxury of waiting to join the dovish camp, with markets projecting that BoC may ease policy as soon as January if Washington and Beijing fail to find common ground this month.

Loonie reaction

Meanwhile in FX markets, investors have fully priced in that the BoC may not take any action on Wednesday but instead hold interest rates flat at 1.75%. Yet, should policymakers express a more cautious view about the future of the economy, flagging that a rate reduction could be delivered as soon as January, the loonie may lose strength against the US dollar, pushing USD/CAD above the 1.3300 resistance level and towards 1.3340, while a bigger negative surprise may also retest the September peak of 1.3381.

Alternatively, a more positive tone stemmed from the recent encouraging domestic data could pressure USD/CAD towards the 1.3260 support area. Breaking that region, the sell-off could stretch down to 1.3200 and then somewhere near 1.3137.

The outcome of the OPEC/non-OPEC meeting on Friday could reinforce any move down in USD/CAD if oil producers decide to deliver deeper production cuts after the March deadline, boosting crude prices. Note that oil accounts for a large part of Canadian exports and therefore any increase in oil prices would be loonie-positive.