The Canadian Dollar to outperform versus other commodity currencies – ING

Markets are pricing in 45bp of easing by the Bank of Canada today. The reasoning is that inflation has now slowed below target and a soft growth picture warrants a faster, 50bp, move to neutral rates, ING’s FX Francesco Pesole notes.

The Loonie can take a hit on a rate cut

“It is a very close call, but we think 25bp remains slightly more likely. The core measures of inflation did not slow further in September, and the labour market recently posted strong gains with the unemployment rate inching lower. The growth picture is incidentally showing some tentative signs of improvement, with the BoC Business Outlook reporting a recovery in future sales expectations in the third quarter. If the conditions for continuing to ease policy persist, those for an outsized rate cut may not.”

“The BoC’s decision today is incidentally made more complicated by the recent hawkish repricing in Fed rate expectations, with some FOMC members now casting doubts on back-to-back cuts into year-end. The BoC has claimed its independence from the Fed, but an excessive gap with US rates may be undesirable, as it weakens CAD ahead of a potentially turbulent US election period, among other reasons. The currency isn’t at the top of the BoC’s concerns, but a persistent depreciation in CAD can lead to higher imported costs.”

“All in all, macro factors and the recent Fed repricing point to a 25bp cut. If the BoC goes ahead with 50bp, one of the reasons may be not to disappoint market pricing. In FX, we think the balance of risks is skewed to the upside for CAD. The loonie can take a hit on a rate cut, but Governor Macklem might not want to endorse expectations for back-to-back 50bp reductions, and the CAD curve does not have much more room to shift lower. We continue to expect CAD outperformance versus other commodity currencies into the US election thanks to the loonie’s lower exposure to Trump-related risk.”