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According to ING’s analysis team, today’s 2Q GDP report of Canadian economy has underlined that strength with the economy growing by a very robust 3.7% annualised versus the 3% consensus figure.

Key Quotes

“It is this decent domestic performance that has so far left the BoC reluctant to follow the crowd of other central banks signalling dovish intentions. We think that will change at the next policy meeting on September 4.”

“After all, if you dig a little deeper into the GDP we find the growth story isn’t as positive as the headline suggests. Exports contributed hugely by growing 13.4%, largely due to the re-starting of oil fields whereas consumer spending grew just 0.5% annualised – the slowest since 2012 – despite healthy income gains. Non-residential business investment actually contracted 16% annualised while residential investment rose for the first time in six quarters.”

“A rate cut at next week’s meeting is an outside  possibility, but  the  imminent federal election (October 21st) and election campaigning getting into full swing make  that doubtful. At the moment the market is pricing in around a two-thirds probability of a rate cut in October, whereas the latest survey of analysts by Bloomberg continues to peg stable rates through this year and next.”

“Given the BoC’s tendency in the past to move swiftly after signalling a change, we are now forecasting a 25bp rate cut at the October 30 meeting.”

“Trade tensions have been the main factor preventing USD/CAD to recouple with the short-term rate spread that would still suggest a weakening of the pair ahead. We expect the rate differential to prevail as a driver in the longer term and remain in the view that USD/CAD can explore the below-1.30 area by 1Q20 and maintain a downward-sloping trajectory for the remainder of 2020.”