We think today’s BoC meeting could see a meaningful change in narrative, with the first upward revision to 2016 growth in almost a year. The improved outlook stems from two sources.
First, underlying momentum has been better than the BoC forecast in January, with Q4 slightly above expectations and then, more importantly, January GDP rising 0.6% month-over-month, which sets up Q1 growth for a big bounce. In fact, even assuming that sequential growth in February and March is zero, the statistical carry-over from January is such that Q1 still grows around 3.7% (annualized) quarter-over-quarter. Even if we assume more modest growth in subsequent quarters, this is enough to lift annual average growth for 2016 to something around 2.0%. In part, underlying growth momentum is looking better-than-expected because non-energy exports are finally coming through, i.e., the effects of the weaker Canadian Dollar are beginning to show.
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Second, the positive fiscal impulse from the expansionary budget is also supportive of growth at the margin. Now, central banks are falling over themselves to sound dovish lately, the Fed most notably so.
We think the BoC will likely take a few pages from that book and use the weaker global growth outlook – the IMF revised down global growth for this year by two-tenths again today in its latest World Economic Outlook – to temper some of the upward revisions to growth. But even factoring this in, we think the BoC should still bring its growth forecast for this year to 1.8% as we outlined in our preview for today, which is quite a bit more positive than the January MPR and right on top of the estimate for potential.
We therefore expect the BoC to sound more upbeat on growth, even if external risks still play a role. From a markets perspective, $/CAD has obviously retraced a long way already. But we think the bulk of the move reflects the rebound in oil prices, while the more domestic angle we are talking about here remains to be priced.
We therefore see continued scope for $/CAD to move lower, with tomorrow a catalyst along the way.