Bank of Canada rate statement coming today
I see risks to the upside for this meeting as the Bank of Canada (BOC) may be less dovish than the market is expecting. Not only has oil been bid in the recent months, but it has recently received a fresh impetus for strength from the US not renenwing waivers on Iranian oil imports. See here for headline. Here are some of Eamonn's key highlights at the time:
- US will not renew exemptions granted in November last year to buyers of Iranian oil
- This is a surprise move
- Countries such as China and India had been granted waivers for six months, and expected those exemptions to be renewed. Nope.
Ok, Saudi Arabia then came out and said that they were not planning to rush in with a hike in production, as Justin points out here. This is understandable since Saudi want to see higher oil prices and this move from the US does some of their work for them. Win, win for Saudi and OPEC.
Back to the BOC. The core inflation reading was a decent beat last week. See here for the preferred trim reading beat at 2.1% vs 1.8%. Adam also had an interesting piece highlighting that economists are looking at rent rates. The issue is that the BOC are now reporting rent in a different way. The result is that:
"After being stable and mild -- bizarrely mild -- for years, the rent component of the Canadian CPI is suddenly blasting higher. A change in StatsCan's methodology (i.e., moving somewhat closer to reality) has led to a sudden acceleration. After averaging just 1.2% annualized gains over the past 15 years, rents have jumped 2.7% y/y. That's the biggest rise in this component since 1992, and we're likely headed much higher, since the six-month trend is 4%"
Jobless claims underpin the S&P 500's strength
This means that CPI is likely to remain underpinned going forward and the BOC know that now with the methodology change.
Putting all this together makes for a pretty strong case of CAD strength after the rate statement with Poloz reflecting a more positive outlook. Also, watch out for the rate announcement as Poloz doesn't mind surprising the market with a rate change, although no change is expected.