Bank of Canada Preview: Upbeat tone on investment may send C$ higher

"A glass more than half full" – Stephen Poloz, Governor of the Bank of Canada, may echo these words, said by his American counterpart when describing the US economy. The Canadian economy's performance may fail to impress, but it stands out in investment – and that may trigger a loonie-positive statement from the BOC.

The BOC last changed its interest rate in October 2018, raising it to the current rate of 1.75%. While the Ottawa-based institution is unlikely to alter the Overnight Rate in its upcoming meeting – concluding a year of sitting on its hands – the tone of statement may certainly move the Canadian dollar.

Gross Domestic Product figures for the third quarter have shown an annualized growth rate of 1.3% – marginally better than expected and well below the rapid expansion of 3.7% in the second quarter. Moreover, Canada's output is rising at a slower pace than the US, with 2.1% in the same period.

The BOC estimates that the economy can expand by 1.7% without pushing inflation – which is at healthy levels – to dangerous territory. At 1.3% GDP growth, the bank may opt for cutting rates to help the economy reach its potential. It even considered it back in October but is unlikely to take this path, nor even hint about it.

Canadian core inflation is hovering around the 2% target, something to envy for other central banks:

Strong business and household investment

Despite unimpressive growth – and weak exports due to subdued global activity – investment has been upbeat. Business investment has leaped by 9.5% annualized in the third quarter, staging a significant recovery. Most of the world, including the US, has suffered from a downfall in funds going to machinery, equipment, and non-residential structures. Higher expenditure implies robust future growth. 

Moreover, the housing market has shown resilience after being hit with tight borrowing rules and curbs on foreign investment. Residential investment leaped by 13.3% in the third quarter. The surge may even worry officials that credit is too cheap, and they may have to raise rates. 

And while both types of investment have been upbeat, consumption has lagged. Contrary to the US, shopping sprees have been more limited, and the savings rate has increased to 3.2% – a four-year high. While the BOC would like to encourage more economic activity, the rise in housing investment mentioned earlier and the still low level of saving may keep it on the fence.

The Canadian job market has been upbeat throughout most of 2019, making October's loss of 1,800 jobs insignificant in the bigger scheme of things. Moreover, wage growth has accelerated to 4.36% yearly as of October, an encouraging sign for a central bank seeking price stability in a world with low inflation. 

USD/CAD potential reactions 

1) Balanced and upbeat: The Canadian dollar may gain ground if the BOC expresses overall satisfaction with the economy. A balanced picture should be enough to send USD/CAD down. The US dollar is under pressure after the disappointing ISM Manufacturing Purchasing Managers' Index. 

2) Rosy: If Poloz and his colleagues paint a rosy picture, noting healthy inflation, rapid wage growth, high investment, and optimism about a stabilization in the global economy, USD/CAD may plunge.

3) Gloomy: Another scenario is that the bank expresses concerns about ongoing trade uncertainties and sees the glass half empty, such as focusing on weak consumption. However, given recent comments by officials, this path has a lower probability. In this case, USD/CAD may rise. 

Conclusion

The BOC is set to leave rates unchanged on December 4, at 15:00 GMT. It will likely strike an upbeat tone amid higher investment and other positive figures, allowing the Canadian dollar to rise.