BoC to hike, but CAD’s headwinds remain - Nomura

Analysts at Nomura explained that they retain their negative stance on the Canadian dollar. 

Key Quotes:

"Wednesday’s BoC meeting may see a slightly more positive tone struck, but our bias remains to sell CAD on any rallies."

"We expect several CAD negative themes to develop in the months ahead."

"First, cracks continue to emerge beneath the headline data. Consumption growth is moderating amid slowing credit growth (Figure 2) and a still-fragile housing market. The labour market remains tight, but wage growth has continued to moderate from its peak of 3.9% in May to 2.2% in September. Real wages thus remain under pressure."

"Second, we remain cautious about how much tightening the market has already priced in for the BoC – particularly relative to the Fed. Rates markets still price a “terminal rate” for the BoC at a similar level to the Fed. This is not withstanding the fact the BoC is hiking from a lower level. We expect growth in Canada to moderate further in the months ahead, and this could see the divergence widen with growth rates in the US still tracking well above trend thanks to fiscal stimulus."

"Third, while oil prices globally have risen, the benefits thus far to the Canadian economy are likely to be more limited. The price of West Canada Select (WCS) Crude has fallen even, while the WTI has been rising. WCS makes up around 40% of the oil weight in the BoC’s commodity price index – note the overall index actually records a decline in Canada’s commodity prices. Therefore, any positive terms-of-trade shock is likely to be limited, if not negative."

Conclusion

"While the BoC may strike a somewhat optimistic tone at this week’s meeting, we do not expect any CAD strength to persist. We retain our bearish medium-term view and look for USD/CAD to grind higher in the months ahead."