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The BoC looks set to up the pace of easing

Published 2024-10-23, 06:31 a/m
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CAD

This afternoon’s BoC decision should be the big market event of the day. We expect to see the Governing Council cut rates by 50bps – a step up in the pace of easing after a series of 25bp moves lower for policy rates. This view is shared by markets too, with swaps pricing an 80% chance of this outcome, and economists favouring 50bps by a 2-1 ratio. All told, we think it is needed too. Inflation dropped to 1.6% YoY in September, the economy is operating in excess supply and the labour market continues to scan as weak, with the recent uptick in job gains an artifact of seasonal adjustments rather than reflecting a surprise strengthening in hiring conditions. That said, we do see modest risks that this last point could see some caution from the Governing Council, once the optics of a 50bp cut to rates are considered. But, in our view, the balance of risks for the Canadian economy is now clearly to the downside, and this warrants a more aggressive approach to policy easing. If delivered, however, we also think this sees a reassessment of the future easing path for the BoC. Open the door to 50bps today, and markets will up the odds of further such moves in the future. With this in mind, we can see downside risks for the loonie, especially if commentary accompanying the decision skews dovish. USDCAD running up to 1.39 under this scenario is a distinct possibility, with 1.40 a tail risk.

USD

The dollar posted further gains on Tuesday, extending its recent run higher. Not only did this leave DXY trading above 104 for the first time since early August, but the index has now gained almost 4% since September 30th. In fact, of the 17 trading days since the dollar’s recent ascent began, 16 have seen the DXY index finish in positive territory. That looks unlikely to change this morning too, with the dollar continuing to make headway. The approach of US elections, and a narrowing of polls in favour of Donald Trump, continues to support the greenback. Moreover, given a light docket of domestic events, there seems to be little that can disrupt this dynamic ahead of next week’s GDP and jobs reports.

EUR

EURUSUD ended Tuesday’s trading flirting with a break of 1.08, a key psychological level for the pair. In part, this was a function of the dollar’s continued run higher, in line with other market moves. But this EURUSD slide was also helped by some dovish ECB commentary too. Notably Centeno, an ECB dove, publicly opened the door to cutting rates in 50bp increments. While not going quite as far, President Lagarde also sounded dovish in an interview with Bloomberg yesterday afternoon. Most importantly for markets, both tied the ECB’s easing path to upcoming data outturns. While the calendar today looks light, tomorrow, PMIs should prove soft given the impact of seasonal adjustments, suggesting that another leg lower for EURUSD looks likely before the end of the week.

GBP

GBPUSD continues to trade around 1.30, reflecting the limited set of recent catalysts for the pair. Even BoE Governor Bailey failed to offer much in his Tuesday speech, choosing not to focus on monetary policy, leaving markets broadly underwhelmed. That said, he gets a second chance today, with Deputy Governor Breeden also set to hit the airwaves. We are inclined to think that commentary will likely skew dovish from one or both, if monetary policy is touched upon, posing downside risks for sterling ahead of tomorrow’s PMI reports.

This content was originally published by our partners at Monex Canada.

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