BoC: Expect no fireworks today - Rabobank

Christian Lawrence, Senior Market Strategist at Rabobank, fully expects the Bank of Canada to leave the policy rate unchanged at 0.50% when they meet on Wednesday 18 January.

Key Quotes

“In fact, the announcement is likely to be something of a non-event with almost nothing priced into the front-end. That said, there are a minority of analysts surveyed by Bloomberg calling for a 25bp cut. Our long held view has been, and remains, that the BoC is unlikely to move rates at all in 2017.”

“The tone of the accompanying rhetoric will of course be key but things have largely progressed as expected and we do not expect a significant change in stance. The tone of the Bank is particularly important to the currency at the moment as the Canada vs. US 2yr swap spread is currently a greater driver of USD/CAD direction than oil prices. These drivers vie for primacy over USD/CAD direction and just a month ago oil was a more important factor than rates. From the US side of the equation, we expect lower rates than the market is currently positioned for and in contrast to the FOMC Dot plot's median expectation of three rate hikes this year, our Fed watcher, Philip Marey, forecasts just one rate hike in 2017 with the most likely juncture being the December meeting.”

“USD/CAD is currently sitting below the 1.32 handle and we view this as an attractive level to start layering into long positions. The tendency for USD/CAD to trade sideways within this range leaves momentum indicators in neutral territory and as such the RSI can be used for timing entries and exits for range traders. As it stands, the RSI is in oversold territory and a move back above 25 would indicate a reversal signal. We see USD/CAD moving back above 1.35 in the coming months but it would require a confirmed close above the 1.36 handle to usher in a new trading range of 1.36-1.3840.”