Canadian Dollar: BoC on hold keeps pair supported – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects the Bank of Canada (BoC) to keep its policy rate unchanged at 2.25% for a seventh straight meeting, as core inflation near 2% allows policymakers to cushion activity against US-Canada trade tensions. Haddad sees current market pricing of 75 bps of BoC hikes over twelve months as too aggressive, implying scope for dovish repricing and USD/CAD moving higher toward 1.4000.

Aggressive hike pricing seen vulnerable

"The Bank of Canada (BoC) is widely expected to keep the policy rate on hold at 2.25% for a seventh consecutive meeting (Wednesday). The worsening US-Canada trade war threatens to derail Canada’s Q2 growth pick-up. Encouragingly, core inflation near 2% gives the BOC room to stand pat and cushion economic activity."

"As such, market pricing 75bps of BoC hikes in the next twelve months look too aggressive, leaving scope for a dovish repricing and USD/CAD higher near 1.4000."

"Remember, the BoC highlighted at its April 29 meeting, that “if the United States imposes significant new trade restrictions on Canada, we may need to cut the policy rate further to support economic growth.”"

"Nevertheless, Canada’s favorable labor market condition argues against a rate cut. Canada’s August labor force survey is due on Friday, and the economy is expected to add +15.0k jobs vs. +75.1k in July with the unemployment rate holding at a two-year low of 6.4%."