USD/CAD Awaits Neutral BOC Today; ECB Has High Burden of Proof
- The European Central Bank has laid out significant expectations for tomorrow's policy meeting, and as a result, there is a high burden of proof in order to see the Euro weaken beyond what's already priced-in.
- See the DailyFX Economic Calendar for Wednesday, December 7.
There are two central bank meetings that will take place over the next 24-hours (give or take a few minutes), but they couldn't be occurring under more different circumstances. The Bank of Canada's rate decision and its resulting impact on the Canadian Dollar will very likely play second fiddle to the European Central Bank's policy meeting and press conference and the volatility arising in the Euro.
The BOC is meeting today under idealistic conditions, all things considered. Canada had a rough start to the year on the growth side, particularly as energy prices slumped worldwide. The BOC's decision to drop rates down to 0.50%, where they are expected to remain today, was in large part due to these factors.
Yet after having only a slightly dovish tone at their last policy meeting, and in the interim having seen Q3'16 Canadian GDP beat expectations and energy prices rally sharply in the wake of the OPEC deal, the BOC will very likely be quite content with sitting on its hands and letting nature take its course. In turn, it's difficult to see how such a contented group of policymakers could stir much action in the Canadian Dollar today.
The ECB, on the other hand, is a different animal. Having riled up market expectations significantly over the past few weeks, there is a high burden of proof to meet in order for the ECB to keep the Euro pinned down. Many of the changes to the ECB's program tomorrow had been signalled ahead of time, such as an extension to the QE program, but perhaps also technical changes to the deposit floor threshold or capital key constraints. Add in concerns about Italian banks after the referendum this week, and it seems that the ECB simply has too tall of a task in front of itself to convince markets everything is 'under control' without bringing out another 'bazooka.' A Euro rally tomorrow may very well be in the cards, even if the ECB extends the QE program to September 2017; it's already priced-in. Markets are continuously discounting the future, after all.
--- Written by Christopher Vecchio, Senior Currency Strategist
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