BOC Preview: Caution could curb CAD, Inflation, housing, and trade in the limelight

The Bank of Canada makes its rate decision on Wednesday, May 30th, at 14:00. There is a broad consensus that the BOC will leave the interest rate unchanged at 1.25%. As there is no planned press conference this time, the focus is solely on the accompanying statement. 

In the April meeting, Governor Stephen Poloz and his colleagues maintained the hawkish bias, saying that rates will rise. However, there is a difference between intentions and implementation. They also provided a more cautious approach as the economy slowed down in the first quarter. Their forecasts included a broader estimate of slack in the economy which implies no imminent fear of inflation.

Inflation

The Bank's mandate is price stability, and inflation has not gone anywhere fast. Headline inflation rose by 0.3% in April, and Core CPI increased by only 0.1%. Prices are rising but at a slow pace. Poloz expected growth and inflation to pick up. It is not falling but not growing either. In the accompanying statement, they may take either direction.

An optimistic wording about expectations for the broader economy and prices to pick up may boost the C$ while a cautious approach could weigh on it. The more likely scenario is to wait for new data and new forecasts in the July meeting before making any new assessment, and a rate hike may wait for later on. 

One of the Bank's core measures of inflation, the Trimmed CPI, accelerated from 2% to 2.1%, but this does not consist of a convincing case for raising rates: other inflation measures have stalled.

Housing

Inflated prices of homes have been a worry in Canada for at least five years. Low interest rates and foreigners buying properties have pushed prices higher in major cities such as Vancouver, Toronto, and Montreal. Various measures have been taken on a lower level to discourage speculative buying such as a special tax on foreigners purchasing homes in Vancouver. Nevertheless, prices are still on the rise. 

If the BOC is not extremely worried about it or if they prefer macro-prudential measures such as new restrictions on mortgages, the Canadian Dollar could benefit. Yet if they cite housing as a reason to potentially raise rates shortly, the currency could advance.

NAFTA

Governor Poloz and other BOC officials have previously expressed concern about the uncertainty in trade negotiations. Poloz even went to say that he cannot imagine the Canadian economy without the North American Free Trade Agreement (NAFTA) which the country is so dependent on. Around the April meeting, there was an impression that the talks between Canada, the US, and Mexico are on the cusp of a successful conclusion as the US removed a critical demand. 

Since then, the Trump Administration has hardened other demands on NAFTA and adopted a tougher stance on trade in general. The Mexcian Presidential Elections are getting close, and no deal is in sight.

Uncertainty takes its toll on business decisions and could also be reflected in the statement. The absence of a done deal will likely keep the BOC from raising rates. If they say it out loud, the Canadian Dollar could react adversely. 

Canadian Dollar positioning

The Canadian Dollar arrives at the BOC decision on the back foot. Apart from the NAFTA negotiations, the recent jobs report was a disappointment as well, with a loss of 1,100 jobs in April. Moreover, oil prices are back down as OPEC, and non-OPEC countries intend to raise production. This is a climbdown from the highs on Canada's critical export. To top it off, the US Dollar continues its rally, now more based on a flight to safety rather than higher yields.

All in all, the bias is for further falls for the loonie, further gains for the USD/CAD.

The levels to watch from top to bottom are: 1.3125 (the 2018 peak), 1.3050 (bottom of the range when the pair traded higher), 1.3000 (a round number and stubborn resistance), 1.2915 (capped the pair on the way up), 1.2860 (a swing low) and 1.2800 (a round number and the bottom of the range).

More: USD/CAD Technical Analysis: Loonie break to a 9-week high, bulls defending the 1.3000 handle