BoC Preview: Wait and see - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, suggests that the Bank of Canada will announce its latest policy rate decision on Wednesday 7th December and Rabobank expects no change to the 0.50% policy rate, a view which is in line with the Bloomberg consensus.

Key Quotes

“Market pricing implies the same outcome with almost nothing priced into the front end of the Canadian curve in terms of cuts. Regular readers will be aware that not only do we expect the BoC to remain on hold at this meeting but also over the course of the next year.”

“Unlike the last decision announced on 19th October, this week’s decision will not be accompanied by a Monetary Policy Report or a new set of economic projections.”

“In the aftermath of the MPR release, Canadian data have been somewhat mixed with CPI inflation data printing slightly below expectations on a core basis and retail sales disappointing but GDP data for Q3 showed some signs of optimism. GDP growth printed above expectations with a 3.5% q/q annualized reading against the consensus call for 3.4% q/q, while Q2’s figure was revised up from -1.6% to -1.3%. Q3 growth was the strongest seen in two years and support was relatively broad-based. If we drill down into the drivers of growth we see that government spending and exports provided a significant boost, as did household consumption.”

“Indeed, government gross fixed capital formation (GFCF) switched from falling 0.9% q/q to increasing 2.6% while exports rose 8.9% q/q following the 14.8% contraction observed in Q2, imports did increase with growth of 3.3% in comparison to 1.4% in Q2 but net trade was clearly supportive of GDP growth. That we should see a pick-up in Q3 following the drag from wildfires in Q2 should come as little surprise but the rise in exports is particularly encouraging given trade growth has lagged relative to high expectations driven by a weaker currency.”

“Outside of the Canadian macro data flow it is worth noting two developments on the oil front - PM Trudeau’s approval of an oil pipeline expansion and the OPEC meeting. On the 29th November, PM Trudeau approved an expansion of a pipeline from the Alberta oil sands to a tanker port in British Columbia. The Kinder Morgan Trans Mountain project expected to increase capacity from 300kbpd to 850kbpd. Of more importance to oil prices, however, was the outcome of the 171st (ordinary) OPEC meeting the following day. In the event, OPEC stated that "The market needs to be rebalanced; re-balancing the market needed courageous decisions from OPEC along with the support of some key [non-OPEC] countries," and a production cut was announced to the tune of 1.2mbpd thus reducing output to 32.5mbpd.”

“This will be effective for six months from 1 January although it is expected that it will be extended for another six months at the next OPEC meeting on 25 May to "take into account prevailing market conditions and prospects". In terms of our forecast, we have left our one year oil price projection unchanged although we have revised up the near term view to reflect this announcement.  We have left the 1yr horizon view unchanged as there remains core implementation risk but more importantly, we are of the view that underlying fundamentals have worsened and the market still won’t rebalance until the second half of next year.”