RBC finds itself in a strange position this week.
The market is 95% priced in for a Bank of Canada rate cut but the country’s largest bank says it’s unnecessary. Now I strongly suspect they will flip that call by the time Wednesday rolls around — particularly if core inflation dips in tomorrow’s Canadian CPI report — but they’re staking out some interesting territory at a time when the market (and myself) are increasingly worried about Canada.
Economists at RBC make a few points:
- Q2 GDP was weak, but July trade and manufacturing gains plus stronger early Q3 data point to a rebound
- RBC card spend tracking suggests consumer demand holding up (there should be a new report this week)
- Housing showing early signs of life (August sales rose y/y in data released today)
- 88% of exports still tariff-free under USMCA
- Fiscal supports ramping up, layoffs limited
The big risk they see is a further US slowdown but highlight that the Bank of Canada — at 2.75% currently — has ammunition to cut if the economy slows.
The Canadian dollar is the strongest G10 performer today as it gets a lift from rising gold prices but USD/CAD has traded in a 200-pip range for the past six weeks. The daily chart looks like it could be cooking up a head-and-shoulders top with a target of the lows of the year. The pairs has fallen nearly 10 full figures since the start of the year.
