Canada: Economy continues to operate close to its capacity - Westpac

Richard Franulovich, Head of FX Strategy at Westpac, points out that the BoC cited trade tensions as the key risk when they hiked rates but still cast a confident tone: the "economy continues to operate close to its capacity“, "exports are being buoyed by strong global demand and higher commodity prices", and, "Business investment is growing in response to solid demand growth”.

Key Quotes         

“The BoC is placing more weight on the “known known” of a solid domestic story versus the “known unknown” of protectionism.”

“Market expectations seem reasonable given the tension between solid conditions, elevated trade risks and a policy rate slowly approaching less accommodative levels. Markets price in a 40% probability of a hike at their next MPR (Oct 25) and fully discount another hike at the subsequent MPR (Jan 2019).”

“The BoC is unlikely to fuel expectations for faster hikes, trade tensions seem certain to build and Chinese growth is  slowing. USD/CAD likely has a tough time breaking down sustainably through 1.3000 near term.”