Synopsis: Goldman Sachs discusses the anticipated monetary policy stance of the Bank of Canada (BoC) in its upcoming October meeting, emphasizing the central bank's reaction to current economic signals. Additionally, they reflect on their recent trading strategy regarding the EUR/CAD pair, influenced by various economic and geopolitical factors.
BoC's Anticipated Stance:
- Despite high core inflation, recent economic indicators are likely to persuade the BoC to maintain its current interest rates.
- The bank is expected to interpret softer growth signals as a necessary recalibration to alleviate inflationary pressures, mirroring its stance from the previous meeting.
Potential for Rate Hikes:
- Goldman Sachs acknowledges a greater propensity for the BoC to increase interest rates than to cut them, considering the economic conditions.
- They foresee the possibility of rate hikes either later this year or in early next, with market expectations aligning around 18 basis points by March next year.
Closing of EUR/CAD Position:
- The firm recently closed its short position on EUR/CAD, triggered by an uptick through their revised profit-stop at 1.45 due to several factors.
- The Canadian dollar's sensitivity to risk, unlike the USD, and various international geopolitical concerns, contributed to this decision.
Future Outlook on CAD:
- Despite this adjustment, Goldman Sachs remains optimistic about the CAD's strength over time, supported by rising oil prices and consistent economic outperformance from the United States.
Conclusion: Goldman Sachs predicts a hold decision from the BoC at its October policy meeting, given the current economic climate. They also detailed their rationale behind closing a profitable short position on EUR/CAD, attributing the decision to the CAD's risk sensitivity and external geopolitical tensions. Nonetheless, the outlook for the CAD remains positive, anticipating strengthening on the back of favorable economic factors, particularly against other currencies.