CAD: BoC to make dovish shift more gradually than the Fed
The Bank of Canada announces monetary policy today and will almost surely keep rates on hold. As discussed in our BoC preview, the focus is on whether the Bank is ready to deliver a Fed-like dovish pivot.
We think it may be too early for a radical shift in the policy message. December’s core inflation figures were hotter than expected, with the trim measure rising from 3.5% to 3.7% and the median measure holding at a revised 3.6%. That may well be enough to outweigh concerns about a cooling off in the jobs market: full-time employment declined by 25k in December.
While the hawkish bias should be softened and the discussion on rate cuts opened, we think the BoC will fall short of the dovish stance expressed by the Federal Reserve in December. Expect the policy message to include concerns about the path of inflation and readiness to keep policy restrictive for longer if necessary. Markets are pricing in around 110bp of tightening by the BoC in the next 12 months: we suspect today’s meeting will fail to endorse those expectations, and CAD can find some moderate support. Still, we expect USD/CAD to find good demand below the 1.34 mark.
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