Wed – Oct 19 – 10 AM ET.
Morgan Stanley: Bearish CAD Into BoC; Sell CAD Vs AUD & NZD
We remain bearish on CAD ahead of this week's BoC meeting where we expect a dovish outcome. In its previous meeting, the BoC stated that inflation risks have tilted somewhat to the downside and growth may be somewhat lower than anticipated in July, softening the hawkish tone that it had been adopting so far despite weak economic data. Deputy Gov. Wilkins reiterated these themes in her speech last week. This increases the possibility of the BoC cutting rates over the next few months, particularly in light of weakening inflation data. 3Q growth expectations have improved somewhat in recent weeks due to better July GDP and a narrower trade deficit but we are still skeptical the BoC's forecasts will be reached. Given the markets are pricing only a few bps of rate cuts for this year, and CAD has the largest long positioning in G10, we think further data weakness could weaken CAD significantly. We like selling CAD against other commodity currencies.
CIBC: BoC On Hold With A Dovish Tone; Already Priced In.
Much of what the Bank of Canada will say this week already be priced in. Governor Poloz is unlikely to cut rates immediately, and the market should already have taken note of hints of a downgrade in the BoC’s medium term growth forecast. But if there’s any reaction in the currency, it will be a modest weakening. The OIS futures market has not priced in any chance of an ease in the quarters ahead. While our base case also has a flat path for Canadian overnight rates, don’t be surprised if the market prices in some chance of a cut in the months ahead. New mortgage rules should reduce the BoC’s fear that a rate cut would fuel a more worrisome housing bubble, and might raise concerns of that a slowing in homebuilding will eat into growth. Look for a dovish tone in the Bank’s message to at least open the door a crack to a rate cut if necessary, a contrast to a more hawkish Fed. That’s reason enough to stay short the loonie even as oil creeps higher.
Credit Agricole: BoC On Hold; CAD Decoupled From Oil Prices.
The CAD has largely decoupled from oil prices recently. Diminished prospects for a Trump presidency have allowed the CAD to regain some ground on the crosses. However USD/CAD remains supported by the broader USD trend and the further widening in the US-Canada rate differentials. Canadian data has improved recently, albeit from weak levels. Against this backdrop we expect the BoC to remain on hold on 19 October as is widely anticipated. In terms of forward guidance, the BoC is likely to re-iterate that risks to its outlook are somewhat to the downside. The accompanying Monetary Policy Report should revise down the 2016 growth forecast, as was already signalled in the September statement, but we expect the BoC to continue to signal a pick-up in growth going forward thanks to fiscal stimulus and stronger economic activity south of the border. We suspect that the BoC will remain sensitive to the incoming inflation data and we will be watching closely the core CPI reading in the September inflation release next week.
Nomura: BoC On Hold With A Dovish Tone.
We expect the BoC to leave its policy rate unchanged at this week’s meeting. We also believe that it will reiterate that risks on inflation remain tilted to the downside and that it will lower its growth forecast in its Monetary Policy Report. We continue to believe that the BoC will leave its policy rate at 0.50% for the rest of the year. We think there are two key questions to consider: 1) is the recent rebound in export performance sustainable, given continued underperformance is non-energy, and 2) what will be the impact of the fiscal stimulus? Until we get more concrete answers on these points, we expect the Bank to retain its wait-and-see approach. However, if further stimulus is judged necessary, we believe it is more likely to come from fiscal policy than from monetary policy
Barclays: BoC On Hold; A Non-Event For CAD.
We and consensus expect the BoC to keep its target for the overnight rate unchanged at 0.5% in its policy meeting on Wednesday. The bank changed its tone in the last meeting in September, dropping the emphasis on a recovery led by non-energy exports and highlighting increased downside risks to the inflation outlook. The latest CPI print came below expectations but stronger trade and employment data, and the expected oil-driven rebound seen in monthly GDP, have been welcome developments for the BoC. The bank is likely to highlight these recent positive data prints while acknowledging that the adjustment process in the economy continues. The Monetary Policy Report will be released and the BoC is likely to modestly revise down its forecasts for inflation and growth because of weaker non-energy exports than anticipated in the July report. Markets are pricing no change for the BoC and the meeting should be a non-event for the loonie if there is no major shift in rhetoric, as we expect.
BofA Merrill: BoC To Stay Put; Limited Impact For CAD.
The BoC will likely remain on hold at its policy meeting, but will play a balancing act. Our baseline view is that the BoC meeting will not likely have a sharp impact on the C$, unless there is a substantial difference in terms of their longer-term view. Despite the likely lack of impact for this meeting, we stress monetary policy differentials between the BOC and the Federal Reserve have been key in driving USD-CAD this year. Indeed, as of late, CAD has not gained much on the back of the recent improvement in oil prices, despite broadly being a commodity currency. In contrast, relative monetary policy has been the more crucial driver for CAD over the past year. The increased relative likelihood of a Fed rate hike has been outweighing the usually positive impact of higher oil for CAD, and nudging USD-CAD higher. Combined with our view that most outcomes of the US election are USD-positive on a medium-term basis, we consequently hold our forecast for the end of the year for USD-CAD of 1.34.
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