The Canadian dollar is vulnerable to the Bank of Canada decision

The Bank of Canada decision is out at the top of the hour and USD/CAD is just a hiccup away from the highest levels since March.

From where I stand, risk are all to the upside as the Bank of Canada inevitably shifts towards a neutral stance and then towards rate cuts. Market pricing is all wrong at the moment, with OIS implying a 60% chance of a further hike in March and just 16 bps in cuts priced in for all of 2024.

Canadian housing market is cracking and Canadian consumers are getting beaten up by high rates. It’s only a matter of time until the economy stalls, in part because it’s so reliant on housing.

The question is whether today’s BOC decision is what triggers the next move lower in the loonie? Just two weeks ago, BOC Governor Tiff Macklem made waves when he said that higher long-term bond rates aren’t a substitute for doing what needs to be done to get inflation back to target. That’s a ridiculous statement because — obviously — higher long-term rates are a better-than-adequate substitution for rate hikes. I expect him to try to walk that back at the press conference at 11 am ET.

So what’s the trade? The September statement said the BOC “is prepared to increase the policy interest rate further if needed.” The first reaction will be on how that language evolves. I suspect it will be watered down but it may be premature for that. Even if it’s left in, the scope for a meaningful bounce in the loonie is limited, especially with the poor risk backdrop in markets today.