BoC remains cautious – Nomura

Sam Bonney, Research Analyst at Nomura, notes that the Bank of Canada (BoC) kept rates on hold as widely expected and there was limited new information in the statement, but the BoC maintained a cautious tone.

Key Quotes

“If anything the statement is marginally dovish. We maintain our bearish CAD bias, and expect USD/CAD to test 1.31 in the near future.”

“The two key points in the statement to note were:

• Consumption outlook: The BoC highlighted slowing household credit growth and softness in the housing market. The BoC will be monitoring closely how the Canadian economy responds to higher interest rates. A faster-than-expected moderation in consumption growth could be a key catalyst for a deteriorating BoC economic outlook.
• Growing trade concerns: The BoC said that “trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks”. This is slightly stronger language than previously, in the light of US President Trump’s recent threats on steel and aluminium tariffs.”

“The market prices roughly a 40% probability of a hike at the next BoC meeting (18 April). Developments in the NAFTA renegotiations and Trump’s tariffs will be important going into this meeting. For now, we expect ongoing trade tensions to weigh on the CAD, and stick to our long GBP/CAD positions. On the macro side, the outlook for the housing sector is critical for the BoC’s outlook. A further moderation in credit, retail sales or employment growth could be catalysts for further BoC caution and are data to watch.”

“A further two BoC hikes look likely this year, but this is already priced by the market. Meanwhile, we continue to believe the BoC will be unable to hike as fast as the Fed further out in the cycle. Growth momentum in the US is likely to accelerate, while moderating in Canada. This should mean the BoC hikes slower than the Fed with a lower end-point. This is not currently priced by the market.”

“We continue to expect the rates differential to exert upward pressure on USD/CAD, looking for the cross to test 1.31 or higher in the near future.”