Bank of Canada to stay on hold – TDS

Analysts at TDS expect the Bank of Canada to stay on hold as universally expected, but the messaging tone is the biggest wild card.

Key Quotes

“While recent data suggest GDP growth has cooled in the third quarter, core inflation and wage growth have picked up, which warrants at the very least a modestly hawkish tone. There has also been little evidence of a cooling in consumer demand for housing or big ticket items, which continue to remain well supported by a combination of low interest rates, a strong labour market and broadly supportive asset valuations. We continue to expect a hike in December.”

“However, there is a risk that the Bank may disappoint and deliver a neutral to dovish tone. Key to watch are revisions to the output gap, characterization of recent economic data and concerns over lingering risks.”

“Rates: With December priced at 50/50, markets are well positioned for a neutral hold. Looking at the risks, there is more scope for rates to rally in a dovish scenario than sell-off if Poloz is more hawkish than expected—it’s hard to imagine a plausible statement that sends December pricing above 80%. Risk/rewards still favours steeper 2s5s.”

“FX: Our base case expectation should reintroduce modest downside pressure back into USDCAD. We note however, that we see the risks as asymmetric as the pair will likely be more vulnerable to a squeeze higher given OIS market pricing.”