Nomura after the Bank of Canada decision:
As expected, the Bank of Canada (BoC) kept it policy rate unchanged at 0.5%, reiterating that "the current stance of monetary policy remains appropriate", suggesting a neutral policy stance.
We view the tone of the statement, one of the shortest in recent years, as remaining slightly cautious with the BoC staying concerned that "business investment and non-energy goods exports continue to disappoint" and that "uncertainty, which has been undermining business confidence and dampening investment in Canada's major trading partners, remain undiminished."
Overall, we continue to expect the BoC to be on hold for most of 2017, but the probability of a cut remains non-trivial, especially if non-energy exports continue to underperform and momentum in the domestic economy remains weak.
Higher oil prices owing to the OPEC deal to cut oil output has supported CAD in the last two weeks, after some underperformance because of higher US yields. We remain bearish on the currency in the medium term owing to 1) continued strength in USD, 2)higher US rates and a widening in the yield spreads with Canada, causing outflows (or at least slower inflows) due to the lower relative yield pick-up of Canadian assets, 3) higher US yields could feed through to the domestic economy in the form of higher borrowing costs, reducing growth and increasing financial stability risk, 4) weak underlying economic momentum, which could compel the BoC back into action sometime next year, and 5) heightened external uncertainties pertaining mainly to Donald Trump's stance on trade
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