SPECIAL REPORT: Ahead Of BoC October


*BoC is widely expected to hold with a neutral lean
*Resilience of domestic economy offers hawkish risks
*Short USDCAD remains strong conviction but could see profit-taking



When?

Bank of Canada's (BoC) rate decision is scheduled on Oct. 31 for release at 1.00am AEDT. The decision kicks off a heavy day of central bank meetings which also sees the Fed and BoJ meet.
 

What's priced in?

Markets are currently expecting no change from the BoC's October rate decision with futures implying a 97% chance that BoC hold the ON Target Rate at 1.75%, in line with the prior month. Our view concurs with market expectations that the BoC remain unchanged given the strength of recent economic data that hit the wires.

2019_10_30-USDCAD-CA10yt.PNG
Canada 10y Yields (LHS, purple) vs USDCAD inverted (RHS, orange). Source: Eikon
 

Data keeps BoC neutral

Since the BoC's last meet on Sep. 5, we've seen strong employment data demonstrating the resilience of the Canadian domestic economy in the face of geopolitical risks, which have evidently quietened down in the past month and seem to be looking up. The fact that risk assets have broadly rallied in October should go some way in tempering the pointed concerns around economic momentum and trade conflicts the BoC mentioned in their last meet. 

While a few data points have strengthened the case for BoC neutrality, there have also been others which suggest the BoC won't be incredibly hawkish leaning.

Domestic employment remains solid, as does the housing situation and sentiment:
  • Aug. employment strong beat 81.1k vs 15k consensus.
  • Sep. employment strong beat 53.7k vs 10k consensus.
  • Aug. house starts beat 226.9k vs 215k consensus.
  • Sep. house starts beat 221.2k vs 214.5k consensus.
But importantly there has been less follow-through to a tighter labour market, wage inflation and housing consumption:
  • Aug. CPI inflation m/m in line -0.1% vs -0.1% consensus.
  • Aug. CPI inflation y/y missed 1.9% vs 2.0% consensus.
  • Aug. Retail Sales m/m missed -0.1% vs 0.4% consensus.
  • Sep. CPI inflation m/m missed -0.4% vs -0.2% consensus.
  • Sep. CPI inflation y/y missed 1.9% vs 2.1% consensus.
Overall, we think the BoC's stance that the "current degree of monetary stimulus remains appropriate" will remain as is and BoC Governor Poloz will most likely remain cautiously optimistic in terms of forward guidance. 
 

Reaction

With markets pricing in an almost near-certainty that the BoC hold rates steady, the source of volatility is likely to come from how the BoC lean. We explore three outcomes.

1. Most likely: unchanged with neutral forward guidance. 
Canadian 10y yields slightly lower. USDCAD marginally bullish.

2. Likely: unchanged with hawkish forward guidance.
Canadian 10y yields bullish. USDCAD bearish.

3. Likely: unchanged with dovish forward guidance. 
Canadian 10y yields bearish. USDCAD bullish.

USDCAD spot price: 1.3090.
Upside intra-month pivot levels: 1.3123 (+33pips), 1.3145 (+55pips).
Downside intra-month pivot levels: 1.3044 (-56pips)



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