Could the BoC remain hawkish? – Preview

Dec 4, 2023 at 9:52 am GMT- Achilleas Georgolopoulos

• BoC meets on Wednesday; it could maintain its hawkish stance

• Market is preparing for a series of rate cuts in 2024

• Loonie’s outperformance against the US dollar could pick up speed

Last Bank of Canada meeting for 2023

December starts on a high note with the final BoC meeting for 2023 held on Wednesday and the respective Fed and ECB meetings scheduled for next week. It has been a tough year for central bankers, but their efforts appear to be paying dividends as the most recent inflation reports have been showing a significant slowdown. As a result, the market has assumed that the key central banks have probably concluded their current tightening cycle. In addition, in the case of Canada, the BoC’s own quarterly forecasts point to inflation dropping even further to 2.2% by the end of 2025, in line with its remit.

BoC officials worry about the housing sector and wages

However, there are several issues keeping the central bankers up at night. For example, wage increases remain high, and along Canada’s population surge, they support strong consumer demand despite the higher borrowing costs. In addition, the repeated rate increases have failed to dent the housing sector demand, thus keeping prices supported and offering a wealth boost to homeowners. Understandably, the minutes from the October BoC gathering revealed a debate in the policy board about the possibility of another rate hike. Decent data releases, like the ones seen last Friday, are probably going to keep this debate alive at the upcoming meeting.

BoC could remain hawkish on Wednesday

One could say that the recent RBNZ meeting probably set the scene for this round of gatherings, and hence being hawkish is a win-win situation for the BoC. If inflation edges higher, maybe due to an oil price rally, which in the case of Canada also means stronger GDP growth, then the BoC could go ahead with another rate hike. This might be shocking for current market expectations, but the BoC has been keeping its option open.

On the flip side, staying hawkish at this gathering does not exclude the possibility of reversing stance, adopting a more dovish rhetoric, and even announcing a rate cut during the first quarter of 2024, if needed. In this case, the market will be content as their current scenario of aggressive rate cuts would quickly be confirmed.

In addition, last week’s OPEC+ shenanigans will probably maintain volatility in the oil market, letting most central banks guess its 2024 trend and impact on inflation. The production cuts announced by OPEC+ for the first quarter of 2024 are mostly voluntary, thus increasing the possibility of certain countries ignoring the OPEC+ agreement and aiming for more, much-needed revenues.

Could the loonie enjoy another rally against the US dollar?

The loonie has managed to outperform the US dollar since the October 25 BoC meeting. This move was predominantly driven by the US leg, but the recent data releases from Canada and the hawkish BoC minutes also played a role. The market expects a quiet and balanced meeting, which if confirmed, will probably allow USD bulls to stage a small upleg above the 100-day SMA at 1.3571.

However, if Macklem et al decide to keep their hawkish stance unchanged and send a message to the market that they could further tighten the current restrictive monetary policy stance, the US dollar-loonie pair could enjoy another sell-off towards the 1.3375 level.