BoC heading for a 25bps hike?

Next week the Bank of Canada meets and it will be an interesting meeting to see how confident the BoC is surrounding a potential slowdown coming for Canadian economic activity. Recalling October’s meeting, there was a 50/50 split over whether the BoC would hike by 50 or 75bps. In the end, the BoC opted for a more conservative 50 bps hike flagging rising concerns surrounding slowing growth for Canada. The BoC indicated that it is starting to consider slowing growth and some CAD downside was expected. These CAD falls were helped by oil market weakness over the Russian oil price cap which also weighed on CAD. You can see below the CAD falls which took place as anticipated at the time.

Further CAD falls to come?

In October after the rate statement, Governor Macklem highlighted that he expected a ‘significant slowing of the economy to occur’. So, for the meeting on Wednesday investors will want to know what Macklem’s view is now. Recent inflation data has been high, but markets did not see those prints as changing the BoC’s view. Short Term Interest Rate markets are pricing in around a 72% chance of a 25bps hike. See below for the Short Term Interest Markets probability from Financial Source.

The peak rate is expected to be at around 4.5% next June and the sharp sell-off we have seen recently in the CAD means that it may pay to be more cautious about the CAD for further selling. However, the next opportunity on Wednesday would come from a more hawkish response from Governor Macklem. If we could see the CAD retrace some of its recent falls, but the risk of a 1H 2023 recession remains, then fading CAD strength could make sense. However, finding the correct currency to pair CAD against will be key on the day and will be discussed in the weekly workshop that takes place on Wednesday.

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