Forex Investment and Currency Trading

Economics: The Bank of Canada is expected to keep rates on hold at 3%. Admittedly, there are arguments that extend in both directions. First, the economy is unambiguously weak. Second, the slowdown in economic activity has started to sow the seeds of some moderation in price pressures. Core CPI still remains below the Bank’s 2% operational target, and was up 1.5% Y/Y in July. Other price metrics have also eased in recent months. But there is still some risk associated with headline price pressures associated with movement in commodities and the loonie, and on that front, the Bank will want some time to assess such risks. The U.S. economy has surprised to the upside, household credit growth is strong, and alternative inflation measures are high. Considering that the Bank has generally retained a neutral bias in the last statement and subsequent rhetoric, it is unlikely that they will make any change to the overnight rate.   

Foreign Exchange: Tomorrow will be all about the Bank of Canada’s statement, as market thinks that the odds of a rate cut are extremely low. After the weak GDP report last Friday, the markets may be expecting a more dovish tone than the Bank of Canada is likely to deliver. Given current market positioning, with stops in the 1.0750/1.0800 area, USDCAD is more vulnerable to a downside move than an upside move. So the balance of risks is tilted toward a dip back into the low 1.06s if the Bank of Canada fails to open the door to rate cuts. 

Fixed Income: There is a slim chance that the Bank of Canada could cut rates on September 3rd, but by far the most likely outcome is an unchanged rate due a neutral-sounding speech last week.  The small chance of a cut extends from the weak GDP report post-BoC speech plus the latest sharp drop in commodity prices.  Still, the market has priced in too high a chance of easing, and thus that the most likely outcome for the bond market from this speech is a modest selloff.  The magnitude is likely to be limited, though, as the BoC should hedge its bets in the accompanying statement by scaling down its level of certainty about the future and conceivably using phrases that signal likely pauses but with a window cracked open in the event that later cuts are needed.