Downside risk for CAD ahead of BoC meeting - ING

The Bank of Canada meets today, and analysts at ING Bank are expecting no change in the monetary stance (in line with consensus).

Key quotes

• "We suspect markets have too aggressively priced out BoC easing and the balance of risks for CAD appears tilted to the downside."
• "Investor sentiment around the prospect of BoC easing has shifted significantly in the past few months."
• "We suspect that a downward revision to the GDP forecasts published in the MPR tomorrow may be on the cards."
• "With any significant change in the monetary policy stance unlikely for now, those projections have the potential to determine most of the market reaction."

CAD implications

We believe the balance of risks for the loonie is tilted to the downside ahead of tomorrow’s rate announcement and that a downward revision in the Bank’s GDP forecasts may prompt markets to bring forward their cut expectations.

The analysts at ING Bank argued that the market’s strong repricing of rate cut expectations puts the bar for a hawkish surprise very high.

The BoC has made the strong economic backdrop the basis of its reluctance to follow the global easing trend and investors' unwillingness to embed poor data into their rate expectations leads us to believe there is a mis-pricing of rate cut probabilities (only 22% for a 1H move) in the next few months.

We continue to have a constructive view on CAD in the longer term and a one-off cut in the next few months would not dent such an advantage. However, our view on the BoC makes us believe USD/CAD will struggle to consistently trade below 1.30 in the near term, also on the back of an uninspiring oil outlook.