The Bank of Canada convenes amid a stronger CAD following the OPEC Accord. What will they do?

Here is their view, courtesy of eFXnews:

The Bank of Canada will hold its last meeting of the year on Wednesday. We and consensus expect the BoC to keep the overnight rate unchanged at 0.5%.

External uncertainty has increased after the last BoC meeting in October thanks to the results of the US elections. Although Trump’s rhetoric was not aimed directly at Canada, any significant revision of NAFTA and a protectionist policy shift in the US would have negative consequences to the economy, while fiscal stimulus, deregulation and a more oil-friendly energy stance in the US could be positive for Canada exports. Given the US policy uncertainty, the BoC will be in a wait-and-see mode, as was stated last week by Governor Poloz when he affirmed that the central bank would not react to hypotheticals.

Data last week were stronger than expected, with GDP printing 3.5% q/q annualized growth in Q3 thanks to a strong rebound of the energy sector after the slump in Q2, and employment increasing for the fourth consecutive month (by 10.7k in November), although mainly driven by part-time employment. The behavior of economic activity is consistent with a slowly closing output gap and convergence of inflation to target in the horizon anticipated by the BoC (mid 2018).

As such, the central bank is likely to see the risk profile of inflation as largely unchanged from its previous meeting. The market is pricing no change in policy rates for the next nine months and this week’s meeting should be mostly a non-event as we expect the BoC to keep its current neutral-to-dovish stance. 

The CAD is likely to be driven by USD sentiment and will be better supported by constructive oil prices after the OPEC agreement.