Updated: Jan 23, 2020
USDCAD shot nearly 100 pips higher after upon the release of the latest BoC rate decision, accompanying statement and updated economic projections. Rates were held at 1.75% as expected, but the statement contained a number of very dovish tweaks that hint a rate cut is on the horizon.
The bank removed its characterisation of rates being appropriate at current levels, implying that the are open to lower rates. Moreover, the bank commented that it is unclear if the slowdown will be temporary or tied to the world. Implicitly here the bank is saying that if the slowdown proves not to be temporary, then they will cut rates.
The bank also released its updated economic projections; in another dovish aspect of the report, the bank’s Q4 GDP growth projection was lowered to 0.3% Y/Y (beneath analyst expectations and fully 1% lower than the banks previous Q4 2019 growth estimate). The forecast for growth in Q1 2020 was revised substantially lower to 1.3% from 1.7%. Finally, the bank’s 2020 GDP growth forecast was cut to 1.6% from 1.7%, but 2021 growth was revised higher to 2% from 1.8%.
The money market implied probability of a March rate cut shot up to 25% from almost nothing, while the probability of a cut in April (when the economic projections will be updated again) rose to 50%. Many analysts are now calling that if Q1 2020 data disappoints (as the Bank of Canada now expects) then it is likely we’ll see a 25bps cut in either March or April based on these comments.
Initially, Governor Poloz didn’t come across quite as dovish as the statement during the Press Conference. He said the bank had weighed the risk of inflation falling against the risk of higher financial vulnerabilities if rates were lowered (implying financial stability concerns present a barrier to the BoC cutting rates).
Moreover, he said the slowdown in late 2019 might reflect a greater pass through effect from international developments, meaning that the recent pick-up in the global economic activity is reassuring. In other words, maybe the fact that global economy's slowdown had more of a negative effect on Canadian growth than anticipated means that the global economy's recovery in recent months might have more of a positive effect on the Canadian economy than previously thought.
However, later in the presser, Poloz dropped his more neutral tone, saying that the door was open to an interest rate cut. USDCAD, which had been gradually unwinding its earlier gains, popped higher on the comment.
All said, data will be of increased importance going forward. Should the Canadian economy not rebound as hoped for by the BoC, as the Governor said, rate cuts will be on the table.