BOC just behind the Fed

Economic synchronicity with the US could lead to extra attention on the BOC's decision ahead of the Fed's move next week.

Deteriorating situation

After hiking by an entire percentage point in July, the BOC has been on a slowing curve, with each hike smaller than the last. The consensus among economists is that it will hike by 25bps when it meets tomorrow. But, as usual, what could drive the market more is expectations for what will happen after that. Bringing the rate up to 4.0%, as expected, would put the BOC behind the Fed, an unusual situation for a commodity currency. This could bode further weakness if economic conditions worldwide continue to deteriorate.

Canada's economy surprised the BOC in the summer, coming in at 2.9% growth instead of the 1.5% expected by the bank. But, since then, the economy has underperformed, in line with expectations of turning negative in the first half of the year. In that vein, the Ivey PMI for November is expected to fall into contraction at 49.0, down from 50.1 prior and the worst performance since January.

Where things go from here

The BOC's preferred measure of inflation had been trending lower through the latter half of the summer, but last month ticked up by a decimal to 5.3%. After the last meeting, governor Macklem said he didn't want the policy to undershoot or overshoot. Which led the market to believe the bank would be taking a more balanced approach going forward as opposed to the more aggressive stance earlier in the year. But with inflation not cooperating, that might change, and the rhetoric in the policy statement could give some insight into what to expect at the next meeting.

A pause would be expected at the next meeting at the current trajectory. A hike by 50bps would likely come as a surprise to the markets, though it has yet to be completely ruled out. Barring that scenario, what could give a hawkish tint to the meeting is if there is an implication that the BOC will hike again in January.

USD/CAD on the rise

Loonie has started to shoot toward the Nov 29 peak at 1.3646 (R1), where a double top could offer bears some respite before the bulls attempt to regain control. Breaking higher will open the door to 1.3700 (R2), encouraging further bids to 1.3800 (R3) and even 1.4067 following the measured move (H) of the three-rising valleys pattern above 1.3978 (R4).

1.3495 (S1) is short-term support bulls must defend for a complete pullback and an upward spiral continuation. Losing the stronghold might bring 1.3385 (S2) back on the radar, risking succumbing below the lower ascending trendline. 1.3315 (S3) might be the last resort for a potential reversal above the low of 1.3226 (S4).

Key takeaways

The BOC is expected to raise interest rates by 25 basis points tomorrow, but the market will be closely watching for clues about the bank's January plans. There is a possibility that the BOC could unexpectedly hike rates by 50bps, but most analysts believe that it will pause at its next meeting.