For their final meeting of the year the RBA is expected to hold its policy rate at 1.5%. It is not likely that the RBA will shift its policy path due to the recent bout of weak housing data, retail sales and disappointing wage growth, as they are clear downside risks to the economy (i.e. the RBA outlook). Activity data has improved but concern over wage deceleration will push communications away from tighten monetary policy. The softness does suggest that we could hear a dovish RBA. Markets are not pricing in a rate hike until 2019, therefore dovish tone will have limited effect on AUD.
The Bank of Canada meeting does have the possibility of a surprise. The BoC has a recent history of surprising the markets with bot cuts and hikes. Heading into December there was only 10% probably of a hike yet stronger economic data has pushed pricing to 20%. In the BoC financial stability report, the banks discussed the high valuation and overleverage households as a primary risk. Gradually higher interest rate would help reduce these risks. With CAD weaker then September tighter policy, will unlikely raise red flags at the BoC. We suspect that market in underpricing the risk of an unexpected rate hike. That said, we remain bearish on commodity currencies and Thursday's OPEC meeting have been unable to break key technical resistance levels.