BOC could hold rates and reiterate cautiousness amid the trade war chaos and weaker oil prices. USD/CAD could close above 1.3500.
The markets are expecting Bank of Canada to keep interest rates unchanged despite economic data such as employment and retail sales having strengthened significantly.
This is due to the escalation of the trade war and weaker oil prices. China, being Canada’s second most important trading partner behind the US, and the prospect of a slower growth in both countries poses as a key risk to Canada’s economic outlook.
- BOC lowered its economic projections during its previous meeting, citing weaker housing and consumption data in months ahead. Since then, housing and consumption data have improved significantly.
- BOC Governor Stephen Poloz said two weeks ago that housing is benefitting from solid fundamentals and he expects growth to pick up later this year.
- We don’t expect BOC to mention loosening its monetary policy as the lowered growth forecast below what most analyst expect would mean it is unlikely that data will disappoint enough to justify a rate cut.
- Furthermore, BOC officials are wary of encouraging more borrowing in an economy already saddled with debt. Inflation has also been hovering around 2% for more than a year.
- However, we believe that the uncertainties in the trade crisis between the US and China will continue to threaten BOC’s outlook for the second half of 2019.
- USD/CAD has been repeatedly testing the 1.3500 price level for weeks but failed to close above. If BOC were to ignore improvements in data and reiterate the threat from the US-China trade war, USD/CAD could break higher.
Fullerton Markets Research Team
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