Last week, Statistics Canada revealed that CPI inflation cooled to 1.6% (YoY) in September, its lowest rate since early 2021 and down from August’s reading of 2.0%. According to the release, the primary driver was a drop in gasoline prices, tumbling 10.7% in September (YoY) from a decline of 5.1% in August. CPI Median and Trim measures remained unchanged in September, averaging 2.35%.
On the jobs front, employment numbers came in better than expected, adding more than double the number of jobs in September (46,700), up from 22,100 in August. Also relevant, full-time employment change rose by 112,000, its largest gain since mid-2022. Additionally, unemployment ticked lower to 6.5%. However, it is worth pointing out that the unemployment rate remains a full percentage point above what it was this time last year, though this is largely due to increased immigration rather than job losses.
GDP growth for Canada expanded by 0.2% in July, with August estimated to have stalled. Consequently, economists forecast Q3 24 growth to come in below the BoC’s Q3 24 estimate (2.8%).
As noted, a 50bp cut is priced in for this week’s decision. This is largely due to inflation numbers and the BoC’s Business Outlook Survey (Q3 24) showing that sentiment remains subdued (the report also noted that future expectations are more optimistic). However, a handful of desks call for a smaller 25bp reduction based partly on a loosening labour market and rising GDP growth (albeit less than the central bank forecasted, as noted above).
In September, BoC Governor Tiff Macklem expressed the need for an acceleration in economic growth to ‘keep inflation close to the centre of the 1.0% to 3.0% inflation-control band’. Therefore, this could push the bank to opt for a bulkier 50bp cut, given lower-than-forecast growth.
While the rate decision is expected to take centre stage, investors will closely monitor the accompanying rate statement, the central bank’s economic forecasts (the Monetary Policy Report will deliver updated projections, which economists expect to be lower than prior projections), and the press conference.
What could this mean for the Canadian dollar this week? Should the BoC defy market consensus and opt for a 25bp reduction, this will likely see an unwind in CAD shorts. According to the technical picture, the USD/CAD is up 2.0% month to date and demonstrates scope to run higher until monthly resistance at C$1.3945. However, daily price is seen testing resistance at C$1.3795, which could continue to deliver a ceiling (particularly if the BoC runs with a 25bp cut); alternatively, punching north opens the door to daily resistance at C$1.3866.
