At its latest policy meeting, the Bank of Canada opted to leave rates unchanged at 0.50%, as was widely anticipated. The accompanying statement was marginally less dovish than expectations at best. All in all, nothing really earth shattering. For me, it’s the undertones within the outlook for the Canadian economy that are of most interest.

Canada has had its share of macro concerns so far this year – both domestic and external. On the external side, the importance of the US to the Canadian economy means that it is particularly sensitive to any changes in US fiscal and trade policies. Much of the focus on the potential renegotiation of NAFTA has been on the impact for Mexico, while little has been said about the implications for Canada. One would assume that given the zero-sum-game nature of global trade, that anything that is positive for the US will, in turn, be negative for Canada. Throw in the uncertainty over any potential Border Tax and you start to see the headwinds that Canada may face in trading with its most important trading partner.

On the domestic side, the housing market has attracted some concern. House prices in both Vancouver and Toronto have been rampant, raising fears of a collapse. These fears have been heightened by the plight of Home Capital Group, a mortgage lender that required a capital injection to stave off a run on deposits following accusations that it had previously misled investors. Funding problems at a “specialised” lender understandably grabbed headlines and prompted caution.

All of these factors weighed on sentiment and pushed the currency and bond yields lower – as such, a lot of downside is now “in the price”. Is it all bad news for Canada? Not necessarily. We may yet see the benefits from a rebound in US growth from both its traditional Q1 lull and via any increase in fiscal spending that (eventually) comes through. History has shown that a strong US economy is ultimately beneficial to Canada, although often with a lag. The optimism around a fiscal splurge in the US has receded somewhat, but if the White House can manage to get a deal done, this can only be good news for the Canadian economy in the future.

Given these cross-winds, the Bank of Canada has been forced to walk a careful path with the bias thus far being towards the downside risk. With pessimism being so negative for much of this year, the chance of an upside surprise in the months ahead is growing – this is something the market isn’t priced for.