Bank of Canada Preview: Canadian Dollar (CAD) Guide for BoC Rate Decision
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USD/CAD, BOC Price Analysis & News
- BoC Expected to Stand Pat on Policy
- All Eyes on Accompanying Statement and Governor Macklem’s Speech
OVERVIEW: The Bank of Canada is widely expected to stand pat on monetary policy with the overnight rate to remain at 0.25% alongside no change in the current pace (CAD 4bn/week) or composition of QE purchases. In light of recently announced provincial lockdowns, there have been slight suggestions that the BoC could opt of a micro-cut (less than the conventional 25bps). However, with analysts unanimously calling for rates to be unchanged and OIS markets implying no chance of a move, a micro-cut appears very unlikely.
ECONOMIC DATA: Since the December meeting, economic data has been marginally better than expected. The BoC’s Business Outlook Survey reported on growing optimism amid the announcement of effective vaccines. Although it is worth keeping in mind, that the survey period had been Nov 10-Dec 1 and therefore prior to increased lockdown measures. Elsewhere, the monthly GDP (Oct) figure rose 0.4%, printing ahead of expectations of 0.3%. However, with Canada back under strict lockdown measures, the focus is less on how the economy performed at the end of last year and instead more on how the economy will be impacted in Q1 2021. Additionally, the latest CPI report highlighted that the average of the BoC’s measure of inflation remained steady at 1.7%. The labour market has been somewhat mixed with the most recent reading showed a contraction in jobs created (-62k). That said, this had been solely due to the contraction in part-time workers, while full-time jobs created saw a marginal increase.
Canadian Data Heatmap
Source: Refinitiv, DailyFX
MPR OCTOBER ASSUMPTIONS
Brent close to $40 (Currently $55)WTI close to $40 (Currently $52)WCS close to $30 (Currently $41)
Oil prices have surged 40% since the October MPR assumptions with a rise since the December meeting. In turn, while the short-term outlook is likely to reflect tough lockdown measures, H2 2021 will be somewhat brighter with the rollout of the COVID vaccine a contributing factor for optimism.
CAD STRENGTH: With the Canadian Dollar trading around multi-year highs against the greenback and the CAD TWI at circa 3-year highs. Loonie strength has become a topic of discussion once again for the Bank of Canada with both the Governor and Deputy Governor making a mention about the exchange rate.
- BOC’S MACKLEM“RECENT C$ APPRECIATION IS HURTING COMPETITIVENESS OF CANADIAN EXPORTERS IN U.S. MARKET”
- BOC'S BEAUDRY: “STRONG C$ IS ONE ELEMENT OF MANY WE ARE LOOKING AT AS WE PREPARE JANUARY MPR”
However, while a stronger CAD may indeed tighten financial conditions, appreciation in the currency has largely resulted from a softer US Dollar. Therefore, more stimulus may have little impact in altering the trajectory in CAD against the USD. As such, an attempt to curtail the Loonie may stem from a reiteration of recent rhetoric in the post-decision press conference. Of note, the current stance in the policy statement is that “a broad-based decline in the US exchange rate has contributed to a further appreciation in the Canadian Dollar”.
MARKET REACTION: A decision by the Bank of Canada to maintain current policy, might see a slight downtick in USD/CAD given the slight risk of a micro-cut, however, the move is likely to be marginal at best as a micro-cut is very unlikely. Instead, focus will be on the accompanying statement and Governor Macklem’s press conference. Therefore, a signal that policy will remain on hold for the foreseeable future despite the recent lockdowns could be enough to lead to a modest move lower in USD/CAD. However, talking down of the currency could see any moves lower in USD/CAD quickly retraced. According to the option markets, the implied move is at 0.45%, which is somewhat elevated given the recent USDCAD reaction to BoC meetings. Elsewhere, heading into the meeting, fast money accounts (leveraged funds) are slightly short the Canadian Dollar (bullish USD/CAD), thus a more positive statement from the BoC could see a more outsized move on the downside.
USD/CAD Reactions Have Been Rather Muted in Recent Months
Fast Money Accounts Slightly Bearish CAD Heading into BoC Meeting
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