The Bank of Canada decision is due at 10 am ET (1400 GMT), here are three things to watch for in the statement.
1. A victory lap on inflation
The previous Bank of Canada statement assured us that “Recent higher inflation is attributable to the temporary effects of higher energy prices, exchange rate pass-through and other sector-specific shocks, rather than to any change in domestic economic fundamentals.” The latest CPI numbers were below consensus and showed inflation at 2.1% compared to 2.4% previously.
2. Better signs on growth/employment
The imbroglio of the July employment report eventually showed 41.7K new jobs and a fall in the unemployment rate to 7.0% from 7.1%. The bigger surprise was Q2 growth at 3.1% compared to 2.7% expected but due to a downward revision in Q1, growth in the first half averaged 2%, just below the BOC’s average forecast for 2014-2016. The latest retail sales report was also strong with ex-autos up 1.5% versus 0.3% expected.
3. The pickup in the US
The July BOC decision talked about “serial disappointment with economic performance” and said “stronger exports and business investment” were critical in closing the output gap. There are signs of a pickup in both but the best signal of all is the relentless improvement in US economic data, something the BOC could acknowledge.
Bottom line:
The BOC is probably the “most neutral” central bank out there and there is wholly expected to be no change in the actual “bottom line” of the statement that says “The Bank is neutral with respect to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks.” But overall there are risks of a more positive tone on domestic and global growth.
Tradeables:
A better tone isn’t largely priced in and comments designed to weaken the Canadian dollar are unlikely. Bias toward Canadian dollar longs.
