BOC behaves like it’s bullish while being terrified of trade tariffs

• The Bank of Canada raised rates as expected and maintained the bullish bias.
• Trade concerns are left, right, and center, limiting the reaction.
• Trade issues could turn the tables for the BOC.

The Bank of Canada hiked the Overnight Rate from 1.25% to 1.50%. They cited a growing economy, a housing market that has stabilized and an upbeat forecast for inflation which is projected to rise to target by the second half of 2019.

Most importantly, the Ottawa based institution maintained its bullish bias by saying that “expects that higher interest rates will be warranted to keep inflation near target” in the last paragraph of the statement. The approach will remain gradual and the BOC stated itis data dependent, but that is not news.

Some had expected the Bank to take a “wait and see” approach after raising rates as some data such as wage growth, have moderated. Nevertheless, the BOC remained optimistic and said the economy is near capacity.

The intention to continue raising rates and the optimism about various parts of the economy lifted the loonie. The USD/CAD fell some 60 pips in the immediate reaction.

Trade, trade, trade, and trade

Nevertheless, the BOC did express concern about trade relations, the big elephant in the room which has a big trunk, if not Trump. Worsening trade relations with the US could not be ignored. The US imposed duties on steel and aluminum, Canada responded, and Trump refused to sign the G-7 communique after Canadian PM Justin Trudeau angered him.

The Bank of Canada mentioned trade no less than four times in the statement. The word appears six times. Here are some highlights:

• US Dollar strength is due to concerns about trade actions.
• The possibility of trade protectionism is the most important threat to global prospects.
• Trade tensions are weighing on investment in some sectors.
• The effect of trade tensions is now judged to be larger.
• The BOC will take into account the response of companies and consumers to trade actions.

The mere word count should be enough to convince that trade is a concern, and the content itself is quite alarming.

While the Canadian Dollar rallied on the bullish bias regarding interest rates, trade concerns could turn the tables and trigger a rethink on rates.