Loonie Falls As BoC On Hold, Says ‘Cautious’ On More Hikes

You might have forgotten about this, but the BoC is today.

ok, here comes Poloz, who's excited?!

better yet: who remembered?! lol

— Heisenberg Report (@heisenbergrpt) October 25, 2017

The furious CAD rally that began just as the spec shorts had built a massive position in late May has come off a bit recently, even as Poloz has seemingly established that he’s not completely averse to surprising the market with rate hikes.

To be sure, those hikes weren’t as ill-advised as they might have seemed given the economic backdrop in Canada, but recently, the data has cooled.

“I’m sure Bank of Canada Governor Poloz will forgive me for saying little about his policy meeting this morning other than to mention that I think a pause is the right thing to do,” Bloomberg’s incorrigible Richard Breslow writes, noting that “it should be presented as a mildly hawkish hold.”

“If he is perceived as more dovish than the numbers and yesterday’s Fiscal Update presented by Finance Minister Morneau imply, then December as a live meeting will be priced out of the market,” Breslow adds, before concluding that that’s “probably more than he should want and might regret.” Speaking of market pricing, here are a couple of charts from Luke Kawa (who wears Canada socks):

Boom!

Heading into today's meeting, markets are now pricing in more tightening from the Fed than the BoC over the next year. #cdnecon pic.twitter.com/shx5wZSWfb

— Luke Kawa (@LJKawa) October 25, 2017

Heading into this meeting, markets have been increasingly paring bets for near-term BoC hikes and upping wagers on 2019 tightening. #cdnecon pic.twitter.com/RI6bGyldog

— Luke Kawa (@LJKawa) October 25, 2017

And here’s a bit from Boris Korby, who summarizes the Bay Street consensus on the Loonie:

More for those Loonie lovers awaiting 2017’s penultimate Bank of Canada meeting with keen anticipation. Even with the Nafta outlook emerging as an important driver, the country’s four biggest banks all say a more hawkish BOC than what’s currently priced in will get the Canadian dollar rally back on track before year-end. A slew of weak data recently sent market odds of a third interest-rate hike this year tumbling below 50%, from north of 75% last month. Yet strategists at Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia all say another increase this year is in the cards, partly on expectations for rising wages and inflation. Bank of Montreal isn’t far behind, calling for another hike in January.

Here’s a look at year-end Loonie forecasts:

Now have a look at positioning:

Note the odd line out in the forecasts chart above (the yellow one). “The biggest risk right now for the loonie is that proxies for positioning and sentiment are close to all-time highs,” Bipan Rai, senior FX and macro strategist at CIBC tells Bloomberg. “In that scenario, we have to ask where the new marginal buyer is going to come from. We do think that USD/CAD will trade back lower into the middle of next year, but positioning needs to be cleared out.”

Oh, and don’t call it a petrocurrency…

Ok, so that’s undoubtedly more than you cared to read about #cdnecon, but you know, there’s no such thing as “too much information” unless of course the subject is what happens in Melania Trump’s bedroom.

Without further ado, here’s the decision (details, summary from BBG):

Bank of Canada holds overnight rate target at 1%, est. 1%

Bank of Canada: “The current stance of monetary policy is appropriate”
- “While less monetary stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate”
- “The Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation”
Growth expected to moderate in 2H 2017 and “remain close to potential over the next two years”
- Real GDP expected to expand 3.1% in 2017, 2.1% in 2018 and 1.5% in 2019, from 2.8%, 2.0% and 1.6% respectively
- Inflation expected to reach 2% by second half of 2018, later than expected in July because of “recent strength in the Canadian dollar”
BOC: Output gap is between -0.5 and 0.5% in 3Q; rising core inflation is “in line with a narrowing output gap”
- “The economy is operating close to its potential” but wage and other data “indicate there is still slack in the economy”
- “There could be more room for more economic growth than the bank is projecting without inflation rising materially above target”
Bank: “Projected export growth is slightly lower than before, in part because of a stronger Canadian dollar than assumed in July”
- Exports and business investment are still expected to make a “solid contribution” to GDP growth
BOC: Contribution of consumption and residential investment to growth is expected to decline due to higher interest rates and policy measures affecting housing markets
Bank of Canada: Higher debt levels mean “household spending is likely more sensitive to interest rates than in the past”
Global growth to average 3.5% from 2017-19, though outlook is influenced by “substantial uncertainty” about geopolitical developments and fiscal and trade polices, including NAFTA