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How Dovish Might the Bank of Canada’s Forecasts Be?

How Dovish Might the Bank of Canada’s Forecasts Be?

Talking Points:

- The Bank of Canada is setting up a rate decision for today, and there is little expectation for an actual move on rates.

- More telling will be the bank’s updated forecasts. The Canadian economy has faced turbulence in exports after an exuberantly-strong Canadian Dollar obviated much of the potential gain from rising oil prices in 2016. How dovish might the Bank of Canada be for near-dated periods?

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The next couple of days offer some potentially market-moving events, starting a little later this morning with the Bank of Canada’s rate decision. The BoC isn’t expected to make any moves here, but what will be relevant and perhaps telling towards the bank’s stance moving forward will be the updated forecasts for the Canadian economy.

The Canadian economy has been on somewhat of a rollercoaster this year. Coming into 2016, the Canadian Dollar was incredibly weak, and this began to show signs of inflation on imported products (such as the Canadian Caulliflower Crisis that sprung up earlier in the year). But after the election of Justin Trudeau on a platform built around economic stimulus, the Bank of Canada took a backseat to monetary stimulus in order to allow Mr. Trudeau’s fiscal plans to begin to work. And the simple act of the Bank of Canada taking a backseat set the stage for the Canadian Dollar to strengthen by more than 2,000 pips in less than three months, from January to the end of April.

But this strength wasn’t all a ‘good thing.’ As Oil prices were recovering for much of this period, that additional strength in the Canadian Dollar has offset a considerable portion of the benefit that the economy may have been able to have taken from rising energy prices. Exports have been abysmal this year for Canada, and now the big question is how much longer the Bank of Canada might be waiting for Mr. Trudeau’s measures to show impact. So, today’s forecasts will likely be the most relevant aspect of the meeting. On the chart below, we’re looking at USD/CAD just ahead of today’s BoC meeting.

So today’s price action in the Canadian Dollar will likely be denominated by how dovish the Bank of Canada’s forecasts might be. Should the bank transmit their expectation for additional weakness, we’ll likely see the Canadian Dollar weaken under the precept that the bank will be investigating additional monetary stimulus measures in the not-too-distant future.

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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