Canadian data of late has been something of a mixed bag, which puts some uncertainty into what the BOC could do. There is a pretty strong consensus that there won’t be any change in the interest rate. But what could move the markets is how hawkish the statement is.

Economists are divided in whether they expect the BOC to announce that rate hikes are over or not. The USDCAD has been on the backfoot as the US dollar has weakened given prospects that the Fed won’t do any more hikes. The Fed hasn’t explicitly said that, yet, but the market is behaving accordingly. The issue is whether the BOC will openly signal that this is as high as rates will go.

A Complicated Scenario for Forecasts

Recent Canadian data has pointed in opposite directions. The latest PMIs, for example, came in well below expectations. This raised the specter of an acceleration to the downside in the economic outlook. But GDP figures and the latest jobs numbers beat expectations, suggesting that the economy is not in as bad shape as many economists say it is.

What the underlying conditions are is pivotal for trying to figure out what the BOC will do. The slowing economy would help keep inflation down, allowing the central bank to give up on tightening. But the BOC has already been burned with a premature pause, seeing inflation rise through the summer. They might be more hesitant to move away from tightening now.

The Comparables are Better

Canadian core inflation was last reported at 2.7%, which is of course still above the 2.0% target. But it’s much closer than the Fed, for example, so it’s understandable that the BOC might move away from hawkishness first. It’s even closer to target than the Euro Area, where the ECB has given up on tightening.

So, the time for changing the language on tightening is getting really close. Therefore it’s likely that investors are pricing in a fairly decent chance of an easing in the rhetoric. The market is pricing in 100bps of cuts for next year. That’s equivalent to four rate cuts. So the flip side, that the BOC suggests hiking is over, might have a smaller impact, since apparently the markets are already preparing for it.

A Lasting Bump?

As expectations for rate cuts next year build, the potential upside of BOC hawkishness becomes increasingly limited. Yes, it might count as a surprise if the suggestion is that there is still a chance of more hikes. But those gains could be short lived, especially if there is another set of positive data.

For the currency pair, what happens with the counterpart might have a bigger impact than what happens in Canada. The Fed has entered its blackout period ahead of its own rate decision. The weaker greenback has been based on an expectation that the Fed will announce its hiking is coming to an end. The BOC might preempt that with their own announcement, and then the currency pair could fade back when the Fed agrees. So, either way, the immediate reaction to the BOC’s decision and policy statement might fade relatively quickly, even though there is a higher chance of a bigger immediate reaction.

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