Preview of the Bank of Canada rate decision on October 19, 2016
Wednesday's Bank of Canada decision is all about the economic forecasts and hints about where policy is headed next.
As for a move tomorrow, it's entirely unlikely. All 25 economists surveyed by the newswires see no change from the 0.50% overnight rate and the market is pricing in a negligible chance of a cut.
Here is what's priced in for the BOC.
What's highly likely is that the Bank of Canada will lower its growth forecasts.
Here are the current forecasts from the July MPC:
- Q3 GDP 1.3%
- Q4 GDP 1.9%
- 2016 GDP 1.3% (consensus 1.2%)
- 2017 GDP 2.2% (consensus 1.9%)
- 2048 GDP 2.1% (consensus 1.9%)
- US 2016 growth 2.0% (consensus is 1.5%)
- World growth +0.9%
What's might skew the results is that Q2 GDP was reported at -1.6% after the forecasts, so that leaves more room for a rebound without changing the underlying story. Even though the BOC expects a 'substantial' rebound, their overall view is that growth will be slower, perhaps 1.1%.
I expect that is a fair estimate of where the market is priced along with the 1.9% consensus in 2016.
For me, the trade is buying CAD if the BOC meets those forecasts. The market has been overly-pessimistic on CAD despite better oil prices, decent economic data and a government that is willing to spend.
In September, the BOC said "risks to the profile for inflation have tilted somewhat to the downside since July" and that may also have important implications.
For the BOC, it's all about 'the output gap' which is the mythological level of the economy where excess capacity is closed and inflation pressures begin to build. It's the lynchpin to BOC policy. If they forecast the output gap will take longer to close, they could lower rates and stimulate the economy. Once forecasts show that the gap poised to close in 12-18 months, they may begin to tighten policy.
The trade
I think the market is overly pessimistic at the moment and think the Canadian dollar is more-likely to rally after the 10 am ET decision (1400 GMT). Note also the Poloz and Deputy Wilkins will hold a press conference at 11:15 am ET and appear before a Senate committee at 4:15 pm ET.
Economic data on growth has been solid. On Tuesday, manufacturing numbers easily beat expectations and recent data on growth and jobs have been strong. In addition, the recent BOC outlook survey indicated that investment might be bottoming.
