Those jobless numbers, Rai explained, are less a sign of mass layoffs and rapid economic deterioration as they are of higher participation rates. The economy added jobs, but a higher participation rate showed that the Canadian economy is now less able to absorb new workers, pointing to a slowdown. GDP growth in Q3 and Q4 has also underperformed the BoC’s expectations, all of which points to downside risk and the need for the BoC to move closer to a neutral rate.
One of the other key concerns for the BoC now, though, is the performance of the Canadian Dollar, which has weakened considerably against the US dollar since the start of Q4. While the stimulatory effect of a weakening CAD may begin to be felt in the medium-term, Rai believes it shouldn’t prevent the BoC from cutting by 50 basis points tomorrow. Moreover, he believes the action of a jumbo cut itself is already priced into the value of the Canadian dollar.
That doesn’t mean tomorrow might not impact currency markets’ view of CAD. Language in either the official communication or Macklem’s press conference could result in a swing in the value of the currency. The threat of US tariffs, too, could impact the place of the Canadian dollar on futures markets, though Rai says there is so much bearishness priced into CAD right now that it would take a significant realization of that tariff threat to meaningfully drive CAD down further.
At the meeting itself, Rai is watching for a few key pieces of language or potential changes to standard BoC procedure. If the BoC changes the guidance that it offers in the final paragraph of its statement that could point to the path for future interest rate decisions. He’s also watching for any mention of the weakness in the Canadian Dollar as well as any comments on that the looming HST holiday might mean for the Canadian economy.
As of now, the overnight index spot market has a 0.46 per cent cut priced in, which is effectively a full bet on a 50 basis point cut. If the BoC only cuts by 25 basis points, Rai says that would indicate a lack of concern about Q4 economic performance on the part of the bank. He says that a smaller cut would be a potential tailwind for the Canadian dollar and should prompt a significant rally in CAD.