At the last meeting, the Bank Of Canada’s Governing Council said that it, ‘will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target’. This was hinting that the BoC could have in fact reached the terminal rate with that surprise 50bps hike. This was why the CAD sold off out of the meeting as the BoC tried to warn that it may have done enough.
However, since December’s meeting expectations have edged up that the BoC will have one more 25bps hike left to take. At the end of last week, Short Term Interest Rate markets saw the terminal rate at around 4.50% for June this year and 2 cuts before the end of the year.
STIR markets put the probability at 65% that the BoC will hike by 25bps and a 35% probability that it will not make any changes to rates. Economists surveyed by Reuters all see the BoC hiking by 25bps, so that is the base expectation.
Headline inflation fell last week to 6.3% y/y from 6.4% expected, but the Trimmed mean edged higher than expectations to 5.3% from 5.2% expected. The trend is lower for inflation-run Canada with the headline following a step-by-step falling pattern, but still way above the 2% target.
The PPI print last week moved nicely lower and raw materials dropped to 7.5% from the 13% expected, so inflationary pressures are broadly falling. However, December’s jobs data was strong with unemployment falling to 5% from the 5.2% expected and a big boost of full-time workers of 84.5K vs the expected fall of -10k. So, another 25bps rate hike seems reasonable.
Trading the decision
Here are the ways that the CAD could move depending on the decision:
No rate change. Expect immediate CAD weakness and USDCAD buying would make sense as markets re-price the missed economic and STIR market expectations.
A hike, but explicit guidance that the BoC has finished. This again would likely see CAD weakness.
As expected print with unclear/vague forward guidance. Much harder to call the CAD’s direction and not a tradable outcome.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure. *Any opinions made in this material are personal to the author and do not reflect the opinions of HYCM. This material is considered a marketing communication and should not be construed as containing investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. HYCM does not take into account your personal investment objectives or financial situation. HYCM makes no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast, or other information supplied by an employee of HYCM, a third party, or otherwise. Without the approval of HYCM, reproduction or redistribution of this information isn’t permitted.