The Bank of Canada has signalled it will ‘proceed carefully’ on further rate cuts but that was before the big US ‘Liberation Day’ risks to global growth and the recent drop in oil prices.
The swift re-ordering has left the market off-balance about what the Bank of Canada might do at Wednesday’s meeting. At the moment, the OIS market pricing is for a 45% chance of a rate cut and a 55% chance of no change.
The strongest messaging from the BOC came on March 26 in the minutes of the latest meeting. They said that policymakers would have likely left rates unchanged if not for tariff risks and the cut was more of an insurance cut to help Canadians manage the uncertainty.
Since then, Canada has seen some better news on tariffs but the uncertainty remains extremely high and the global picture has worsened. Today’s CPI report added to the reasons to cut with prices falling to 2.3% from 2.6% y/y, which was 0.3 pp below what economists were expecting.
Looking ahead, inflation is likely to fall below 2% in April because of the removal of the carbon tax and the swift falling gasoline prices due to lower oil prices. In addition, the drop in crude prices materially undermines Canada’s terms of trade.
Finally, indications on the spring housing market so far have been poor. The inventory of homes for sale in the Toronto area is already above last year’s peak and the condo market is frozen, with home builders rapidly halting projects.
The consumer spending side of the economy has held up but the March employment report saw a troubling 32.6K decline (and double that in full-time jobs) in the worst reading since 2022.
All of this argues for a rate cut on Wednesday but the consensus of economists remains for no change for 2.75% but it’s narrow with 18 seeing a hold and 11 forecasting a cut.
BOC overnight rate
The Canadian dollar
The currency market reaction to the BOC decision might be counter-intuitive, particularly after the kneejerk. Normally, a currency will fall after a rate cut, particularly when one isn’t fully expected.
However I believe we’ve entered a regime where the market is more concerned about forward growth than interest rates and carry. That’s because we’re witnessing the upending of the global order and a true US-China trade war that’s likely to badly damage global growth and ultimately restrain prices. The economies that come through that the best will have to navigate both sides but will also benefit from domestic stimulus via rate cuts.
With that in mind, I would considering selling USD/CAD on a rise above 1.40 in the aftermath of a BOC cut. At the same time, it’s a difficult currency to trade at the moment based on Canadian fundamentals alone because there are tariff headlines that move the USD and risk assets daily, so any trade requires a nimble approach.
The decision is at 9:45 am ET.
