Canadian Dollar: Why is BoC guidance crucial for the CAD outlook? - Commerzbank

The Canadian Dollar (CAD) response is likely to depend on December guidance and revised inflation forecasts, according to Commerzbank, which is more sceptical than markets about the four rate hikes priced in by September next year. Commerzbank’s Norman Liebke expects the Bank of Canada (BoC) to raise rates by a widely anticipated 25 bps to 2.5%, although he considers the move premature in view of subdued core inflation.

Will the tone determine the rate decision’s impact?

"At 2:45 pm Central European Time this afternoon, the Bank of Canada will announce its interest-rate decision. By now, a 25-basis-point rate hike to 2.5%, with markets pricing in an 80% probability, appears to be almost a done deal."

"After all, markets have already priced in a total of four rate hikes by September next year. However, we remain somewhat more sceptical than the market regarding the future path of interest rates."

"Accordingly, the focus will be, first, on any potential forward guidance for the December meeting and, second, on the BoC’s new inflation forecasts. Macklem has already indicated that the inflation projections will need to be revised upwards. This is hardly surprising, however, given that headline inflation exceeded 3% in the third quarter, whereas the BoC had projected 2.5%."

"The BoC could be at least somewhat nervous about developments in inflation expectations. In the latest BoC survey, 44% of the companies surveyed expect inflation to remain above 3% over the next two years. Against this backdrop, today’s rate hike could also serve to underscore the BoC’s credibility in fighting inflation."

"If the BoC raises rates as expected and essentially reiterates its previous hawkish comments, the CAD is unlikely to move much. If, however, the rate hike fails to materialise or the comments are at least somewhat more dovish, the CAD is likely to depreciate as markets price out some of their rate-hike expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)