What to watch out for
The outlook for the Canadian Economy is generally positive when compared to other Central Banks. The December 2019 rate statement was more hawkish than the market was expecting and this led to some CAD strength. The rate statement referred to the Q3 investment spending positively and ‘nascent evidence that the global economy is stabilising’. Recently the latest CAD employment figures have been strong. Also, the last CPI data delivered with the headline coming in at +2.2% vs +2.2% y/y expected and the median was a beat at +2.4% vs +2.2% expected. The median figure was the highest since 2009 and I would consider this enough for the BoC to retain its hawkish bias.
The BoC meets today and I am expecting a hawkish hold and a bullish case for CAD. This is not only related to the domestic data but also due to the scaling back in global risks for the Canadian economy. The signing of the phase 1 trade deal will provide temporary relief for the BoC as they highlighted global tensions as a reason for caution in their December rate meeting. However, although the market is firmly expecting the BoC to remain on hold for the first half of 2020, there are still expectations of a rate cut of 25bps by December 2020. This is reflecting the increased uncertainty of a Phase 2 trade deal.
If there is, in fact, a bullish hold by the BoC, look to pair the CAD against a weak currency for any potential trades out of the BoC rate meeting. If on the other hand, the Bank of Canada turns more dovish, look to pair the CAD with a strong currency. If recent risk-off tones from China’s virus outbreak remains then the JPY would be a suitable counterpart as it finds buyers in risk-off markets.
Either way, this is a key event, so one should expect market volatility around 15:00GMT today and later at 16:15GMT for the press conference.
Please also be aware that we have Canadian CPI data released at 13:30GMT today too and as of last month’s report all measures are within the 2% level. A strong deviation will move the CAD, so look for both CPI and the Rate Statement to be in the same direction (e.g. either bullish or bearish) for a potential directional trade out of the two risk events.