Canadian Dollar: US tensions overshadow BoC stance – Commerzbank

Commerzbank’s Michael Pfister expects the Bank of Canada to hold its key rate at 2.25%, a move he says is fully priced with only a small chance of a hike. While officials may hint at tightening early next year, he argues the Canadian Dollar’s outlook is dominated by strained US relations, tariffs and growth risks rather than domestic monetary policy.

BoC on hold as politics dominate

"The Bank of Canada is widely expected to keep its key interest rate at 2.25% for another meeting. But this outcome has already been fully priced in, with only a small residual probability of a rate hike being anticipated."

"Although the Canadian real economy has slowly recovered in recent weeks, the BoC has remained cautious in its announcements regarding monetary policy tightening."

"This has weighed on the Canadian dollar, given that most other central banks were expected to implement significantly more rate hikes simultaneously. Officials may provide clearer indications today of a rate hike early next year."

"The main problem for the CAD is nevertheless likely to remain unresolved: Relations between Canada and the US have once again hit a low point, and it is unclear whether the situation will improve in the coming weeks."

"The labour market is likely to be affected by the new tariffs, and growth is also expected to slow down slightly. Until the situation eases, interest rate hikes are unlikely to be a priority."

"Even if officials drop hints today, market participants should thus be aware that the CAD's fate currently depends more on US relations than on Canadian monetary policy."