Some Market Players Suddenly Think Bank of Canada Could Cut Rates

Rates, loonie in focus

Some market players are now betting that the Bank of Canada could cut interest rates, rather than hike.

The speculation is mild at this point, but it’s the shift in sentiment that’s important, said chief currency strategist Camilla Sutton of Bank of Nova Scotia.

This shift began Friday as Statistics Canada released what was seen as a weak labour market report, showing a loss of 4,300 jobs in December and the unemployment rate holding at 6.6 per cent.

As The Globe and Mail’s David Parkinson reported, December marked two consecutive months of jobs losses, though the numbers were actually better than they looked because of the strength in full-time employment.

Still, some in the markets suddenly changed their view, speculating that the Bank of Canada could cut its benchmark rate from 1 per cent at some point in the next year, Ms. Sutton said.

Before that, the speculation had been on when the central bank under Governor Stephen Poloz could raise rates for the first time.

That’s not to say that Ms. Sutton sees a rate cut in the cards, only that some others do.

“Markets are pricing in a 4-per-cent probability of an interest rate cut in Canada over the next 12 months,” she said.

“The shift has been relatively dramatic with the market having been pricing in an 8-per-cent probability of a hike just two sessions ago,” she added.

“Weaker-than-expected employment combined with falling oil prices is taking its toll on BoC expectations and CAD; however, we would suggest that the deterioration needed for the BoC to turn towards interest rate cuts would be significant, and is not part of our forecasts.”

She was referring to the loonie by its symbol.

No matter how it plays out, rates aren’t going to rise any time soon.

Charles St-Arnaud of Nomura Securities, for example, said yesterday that he expects the Bank of Canada to cut its outlook for economic growth when it releases its monetary policy report next week, by 0.3 of a percentage point, in turn bringing new thinking to the rate outlook in the markets.

“If we are correct, this means that growth in 2015 would be only slightly higher than potential,” he said.

“With the output gap closing at a slower pace, we doubt the BoC will be in a position to hike rates until 2016.”

The plunge in oil prices has prompted some observers to push back their expectations for a rate hike until sometime next year, thus lagging the Federal Reserve.

Indeed, Mr. Poloz said recently that the collapse in oil prices could shave 0.3 of a point from economic growth this year.

But, as senior economist Sal Guatieri of BMO Nesbitt Burns noted, that was a month ago.

“Since then, prices have slid a further $17, which could have at least another tenth off growth,” Mr. Guatieri said today.

“A further downgrade of the bank’s growth outlook could push a rate hike into 2016,” he added.

“We are currently calling for an October 2015 move (four months after Fed liftoff, but this could change if Lane sounds particularly gloomy today.”

All of this has played into the weakness of the Canadian dollar, which has tumbled along with crude prices, and hit new depths again today.

The loonie, as the country’s dollar coin is known, touched a low of 83.38 cents U.S., and a high of 83.82, settling into its new territory below the 84-cent mark.

And it could dip further today, Ms. Sutton said, as markets await a speech by Timothy Lane, the Bank of Canada’s deputy governor, on oil and its impact on the economy.

The Canadian dollar lost 9 per cent, and just about everyone sees it losing more ground this year.

Nomura Securities has one of the harsher forecasts, projecting the loonie will dip below 79 cents by the third quarter.

Source: Globe & Mail

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