BoC: Housing market remains a concern for policymakers - BBH

"Since early June, the Bank of Canada put the market on notice that it no longer judged that the economy warranted the level of accommodation that in did in 2015 when it cut rates twice," notes Marc Chandler, Global Head of Currency Strategy at BBH.

Key quotes:

"It took one of those cuts back in July and was expected to take the other one back in October.  News last week that the Canadian growth continued to accelerate in Q2 spurred speculation that the rate hike can be brought forward to Wednesday, September 6."  

"Growth in Q2 unexpectedly increased to 4.5% on an annualized basis from 3.7% in Q1.  Economists were looking at an unchanged rate, while in July, the Bank of Canada suggested a modest slowing to 3% was likely. Consumption rose 2.6%."   

"This is not to suggest that the Canadian economy is firing on all cylinders.  It is not. The housing market remains a concern for policymakers.  The effects of the macroprudential efforts to rein in excess in the housing market in Vancouver seem to be wearing off, warning of similar results in the Greater Toronto area that more recently implemented analogous policies.  Non-energy exports are struggling to find traction, they fell in June, though are up from a year ago.  The July merchandise trade balance will be reported the same day as the Bank of Canada meeting."   

"The impact of the storm that socked Houston and the Gulf of Mexico may encourage caution.  There is also uncertainty surrounding the future of NAFTA after Trump renewed this threat to withdraw.  The second round of NAFTA negotiations began on September 1 in Mexico City and will continue through September 5.   US businesses have begun pushing back against some of the demands by the Trump Administration, especially on changes in the domestic content rules and the push to jettison the trade tribunals.  This latter point was a red line for Canada."   

"The Bank of Canada's meeting on September 6 will not be followed by a press conference or a Monetary Policy Review.  The Canadian dollar rallied 2.6% against the US dollar after the strong GDP reported, and pushed the US dollar below CAD1.24 for the first time in two years.   Speculative positioning in the futures market is extended.  The net long position in August reached it highest level in a little more than four years, while the gross long speculative position moved is holding above 80k contracts for the first time in five years. Interpolating from indications from Overnight Index Swaps, the market has a slight lean in favor of a hike next week."   

"That said, we suggest that the Canadian dollar may weak regardless of when the Bank of Canada does.  A rate hike may spur selling on the fact after the rumor was bought.  Standing pat would see the Canadian dollar weaken on disappointment.  We suspect that the failure to hike rates would produce a better buying opportunity.  Confidence that a hike will be forthcoming will bring in new demand on the pullback.  A hike, ironically, will leave the market unsure if the Bank of Canada intends to simply reverse the 2015 cuts or will it continue to hike."