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All eyes and ears were on the Bank of Canada, which announced its decision to keep rates steady at 1.00% while signaling weaker prospects for a December hike.

  • BOC maintained rates at 1.00% as expected
  • BOC upgraded GDP forecasts but downgraded inflation estimates
  • BOC: Less stimulus required over time but cautious on future rate hikes
  • BOC: Labor market slack provides room for growth without inflation
  • BOC: Inflation to reach 2% by second half of next year, may be later due to CAD strength
  • U.S. headline durable goods orders up 2.2% vs. 1.0% forecast
  • U.S. core durable goods orders up 0.7% vs. 0.5% forecast
  • U.S. house price index up 0.7% vs. 0.4% forecast
  • U.S. new home sales up from 561K to 667K vs. 555K forecast

Major Events/Reports

BOC interest rate decision

As expected, BOC Governor Poloz and his gang of policymakers paused from their streak of interest rate hikes this time and sat on their hands.

In their official statement, policymakers noted that inflation has picked up in recent months due to stronger economic performance and higher gasoline prices. The central bank projected that the 2% target will be reached by the second half of 2018, pushed back from their earlier forecast due to CAD strength.

The BOC also acknowledged that the Canadian economy posted better than expected growth figures in Q2 but that it could moderate for the rest of the year. And while exports have made a solid contribution to GDP, they predicted that activity could slow due to *surprise, surprise* CAD strength.

Lastly, the BOC mentioned that there is still slack in the labor market, which means that there could be room for a bit more growth even with slow inflation.

“While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate.”

With that, the BOC concluded that upcoming decisions will be data-dependent, particularly when it comes to the dynamics of wages and inflation.

BOC statement presser

The fun didn’t stop there for the Loonie! The press conference that followed the official statement contained more insight on the central bank’s outlook that led market participants to price in weaker odds of a December hike.

BOC Governor Poloz explained that they are paying extra close attention to downside risks to inflation even while growth has been strong. He added that the Canadian economy is likely to keep expanding above its potential pace but that production is running close to full capacity.

Meanwhile BOC member Wilkins noted that CAD appreciation is having a significant impact on price levels. However, they are also considering the idea that this might just be transitory.

Both policymakers also mentioned that NAFTA negotiations are posing some uncertainties, causing some companies to scale back their investments. Although any changes could take some time before they are implemented, this could still lead to adjustments in their projections.

Stronger than expected U.S. data

It was all green for Uncle Sam as the latest slew of economic reports churned out better than expected results.

Headline durable goods orders rose by 2.2% to outpace the 1.0% forecast while the core version of the report showed a 0.7% increase versus the estimated 0.5% gain. Components of the report revealed that increases in orders of computers and electronic products, as well as fabricated metal products, drove overall gains.

The housing industry also had its fair share of upside surprises as new home sales jumped from 561K to 667K instead of falling to the 555K consensus. As it turned out, rebuilding in the South after the recent hurricanes boosted the number to its highest level since 2007. The house price index also had a positive surprise at a 0.7% gain versus the projected 0.5% uptick.

Major Market Mover(s):

CAD

Even though everyone and his momma expected the BOC to stand pat, some parts of their statement and monetary policy report dampened hopes for another hike in December.

USD/CAD jumped from a low of 1.2637 to a high of 1.2818 after the announcement, CAD/JPY is down from 90.10 to 88.59, EUR/CAD popped up to the 1.5100 area, and GBP/CAD reached a high of 1.7003.

Watch Out For:

  • 1:30 am GMT: Australian import prices q/q (-1.5% expected, -0.1% previous)