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Dec 6, 2017

Canada's strong economic data unlikely to shake Poloz pause

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Investors in Canadian assets may be wise to look through the stronger-than-expected economic data last week because they probably won’t alter the Bank of Canada’s wait-and-see approach to monetary policy.

The loonie jumped the most in three months and short-term rates spiked on Friday after Canada posted the biggest monthly increase in jobs since 2012 and the economy grew faster than expected in the third quarter.

The reports are unlikely to derail Bank of Canada Governor Stephen Poloz’s cautious stance, with growth expected to slow in 2018 and stretched households are vulnerable to a jump in borrowing costs. All but three of 26 economists surveyed by Bloomberg expect the central bank to keep rates unchanged at 1 per cent on Wednesday, its last policy meeting this year. The bank releases its rate decision at 10 a.m. in Ottawa.

“Although the jobs numbers probably moved the dial for the bank in a slightly positive sense, I don’t think it really means that there’s going to be any significant change of views here,” said Shaun Osborne, chief foreign exchange strategist at Bank of Nova Scotia in Toronto. “What we’ve heard from the bank, and Poloz in particular, recently is a fairly strong indication that having got back to 1 per cent, they’re probably going to remain on hold for a while here.”

Swaps traders place just a 16 per cent chance of a rate increase Wednesday, following two hikes in 2017. Odds jump to 39 per cent for a move in January and 69 percent in March.

Osborne sees the Canadian dollar weakening to $1.28 per U.S. dollar by the end of the year from $1.2695 at 4 p.m. in Toronto on Tuesday.

The stronger than expected data upset a trend of steady declines in short-term yields as traders were gradually scaling back expectations for further monetary tightening. The rate on Canada’s two-year government bond was at 1.54 per cent on Tuesday, seven basis points below a six-year high reached in September, after shooting up nine basis points on Friday.

“The bond market got a little spooked by the jobs and GDP data,” said Kamyar Hazaveh, who oversees about $11 billion ) in fixed income at CI Investments Inc. “It would be wise for the bank to actually tone that down.”