Bank of America provides a preview for the upcoming Bank of Canada policy meeting on December 6 and its implications for the Canadian dollar. BofA expects the BOC to maintain its current policy rate, with potential implications for future rate cuts and CAD performance.
Key Points:
- BoC Expected to Hold Rates: BofA anticipates the BoC will maintain the overnight rate at 5.0% in the December meeting.
- Economic Weakness and Inflation Trends: The Canadian economy showed weakness with a GDP contraction in Q3, and while inflation is falling, core inflation remains high. This mixed picture suggests continued caution from the BoC.
- Potential Shift in BoC Language: There is a risk that the BoC might shift from a “hawkish hold” to a “dovish hold” in its language, although BofA believes it might be too early for such a change.
- BoC Rate Cut Cycle in 2024: BofA expects the BoC to start cutting rates in June 2024, with the possibility of an earlier start if inflation moves lower.
- Comparison with US Rate Cuts: Slower growth in Canada might allow for faster rate cuts compared to the US.
- CAD Performance: Amid the broad USD selloff, the CAD is expected to lag behind other G10 high-beta currencies until the Fed begins its rate-cutting cycle.
- Seasonal CAD Trends: December traditionally shows the most bearish trends for CAD against the New Zealand Dollar (NZD) and Scandinavian currencies.
Conclusion:
BofA’s preview of the BoC’s December policy meeting indicates a likelihood of maintaining the current rate, with careful monitoring of inflation and economic trends. The potential for a shift in language from the BoC towards a more dovish stance, and the expectations for rate cuts in 2024, could impact CAD’s performance, especially in comparison to other G10 currencies and in the context of broader USD movements. CAD is likely to underperform against high-beta currencies until the Fed commences its rate-cutting cycle, with specific bearish trends expected against NZD and Scandinavian currencies in December.
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