Synopsis:

Goldman Sachs expects the Bank of Canada (BoC) to deliver a 50bps rate cut at this week’s December policy meeting, though they acknowledge a 25bps cut is a credible alternative. Slowing growth, a rising unemployment rate, and a lower-than-expected Q3 GDP print strengthen the case for more aggressive easing.

Key Points:

• Rate Cut Expectations:

  • Base Case: A 50bps cut, bringing the policy rate closer to the lower end of the BoC’s neutral range estimate of 2.25%.
  • Alternative Scenario: A smaller 25bps cut, reflecting cautious adjustments amid uncertain economic conditions.

• Economic Drivers:

  • Weak Growth: Q3 GDP expanded just 1.0% (vs. the BoC’s 1.5% forecast), underscoring economic softness.
  • Labor Market Struggles: The unemployment rate has climbed after a brief stabilization period, adding urgency to policy easing.

• USD/CAD Outlook:

  • Near-Term Impact: A 50bps cut could apply upward pressure on USD/CAD, reflecting policy divergence with the Fed.
  • Medium-Term View: Goldman Sachs sees the market underpricing the BoC’s easing potential and expects more USD/CAD upside due to tariff-related risks and Canada’s weaker economic trajectory.

Conclusion:

Goldman Sachs anticipates a 50bps rate cut from the BoC, driven by disappointing growth and labor market data. A smaller 25bps cut is possible but less likely. The expected policy move could push USD/CAD higher in both the near and medium term, especially as Canada’s economic vulnerabilities and tariff-related uncertainties persist.