Wednesday’s Bank of Canada interest rate decision is one of the most intriguing this year.
Six things I think about:
1) What is the price
The market has priced in a 24% and 90% downside probability at the next meeting on June 5.
Most of this year’s decisions – including this week’s ECB decision – have been telegraphed. For 2024, the market has integrated 73 basis points.
2) The Bank of Canada is not afraid to surprise
The Bank of Canada likes to give advice to markets, but if policymakers think it’s time to cut or raise rates, they won’t give markets one more meeting to prepare. Particularly in the Tiff Macklem era, the BOC did what it felt was necessary, which unbalanced the markets. There hasn’t been enough evidence of reductions to justify a 24% probability, but the market remembers history.
3) Market mulls divergence with Fed
Rightly or wrongly, many market participants believe that the global easing cycle will not start until the Fed signals it. This is particularly true of neighboring Canada. I think this is wrong and the rate cut by the Swiss National Bank already highlights a growing global divergence. Aside from the ripple effects of growth and inflation in the United States, the Bank of Canada does not use the United States to calibrate its policy. Yes, they could take currency effects into account, but those are harder to predict than what the manual says. Certainly, the loonie would fall if rates were cut, but it would risk falling further if the Bank of Canada was too late to cut rates and a recession loomed.
4) Housing is a priority
The Trudeau government is under fire over rampant immigration and the cost of housing. Every day, all major Canadian newspapers publish articles on these topics, and economists from major Canadian banks also talk about them every week. The Prime Minister is struggling with these two issues and looking for solutions as he sinks into oblivion in swimming pools. This shows how critical the problem is and this also appeared to be the case at the Bank of Canada, where housing and rent inflation is a problem and a slowdown in housing construction could seriously hamper GDP.
It’s an incredible painting:
5) What do recent data say?
Main recent indicators:
- Canadian jobs -2.2K versus +25K expected
- Unemployment rate 6.1% versus 5.9% expected
- Bank of Canada Business Outlook Survey Improves Slightly
- Retail sales excluding automobiles +0.5% vs -0.4%
- February: retail sales up +0.1%
- CPI y/a 2.8% vs. 3.1% exp.
- Core CPI 2.1% versus 2.4% previously
Add it all up and you can see why the market has been tilting toward the possibility of a cut, especially Friday’s jobs report.
6) What will happen to the Canadian dollar
If you assume the Bank of Canada holds rates this time around, the knee-jerk reaction will be stronger on the loonie, but it may not last as there is a very good chance that the BOC will also include strong dovish hints on what will happen in the press release or in the press. conference. The risk would be that the BOC decides not to give any guidance and warns that it must finish work on the delicate aspects of inflation.
If they cut, it will be a direct sale in Canadian dollars and I would expect a significant drop. This would lead to a breakout of USD/CAD towards 1.38.
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