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Bank of Canada Preview: How Will the Canadian Dollar (CAD) React?

Bank of Canada Preview: How Will the Canadian Dollar (CAD) React?

Justin McQueen, Strategist

USD/CAD, BOC Price Analysis & News

  • CAD Reaction Dependent on Absortion of Economic Slack Assessment
  • Risks are Geared Towards Disappointment Prompting a CAD Pullback

OVERVIEW: The Bank of Canada is expected to maintain its current monetary policy stance with the overnight rate to remain at 0.25%. The current stance from the BoC is that the policy rate will remain on hold until economic slack is absorbed, which is expected to happen sometime in the middle quarters of 2022. That said, while expectations over a possible Q1 rate rise has increased, with no monetary policy report until January, there is a risk of disappointment should the BoC maintain its current stance and not bring forward expectations that economic slack will be absorbed in Q1.

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ECONOMIC DATA: While economic data has largely evolved as the Bank had anticipated, the main data point that has prompted an increase in BoC tightening bets had been the stellar labour market report, which crushed expectations with Canada appearing to move beyond full employment. However, the key focus is whether this is enough to lead to the BoC bringing forward the expected closure of economic slack to Q1, particularly in light of the new Omicron variant, which could see the BoC stick to its current stance.

Taking a look at the BoC’s MPR assumptions, the central bank based its assumptions on Brent and WTI at $80/bbl and $75/bbl respectively. In turn, with oil prices seeing a notable correction, this could somewhat temper the BoC’s optimistic message and thus provide another reason for sticking to its current stance.

MPR OCTOBER ASSUMPTIONS

Brent close to $80 (Currently $75)

WTI close to $75 (Currently $72)

WCS close to $65 (Currently $54)

MARKET REACTION: My view is that the BoC meeting is gearing up for a slight disappointment and thus will result in a slight pullback for the Canadian Dollar. The trigger will be the guidance surrounding the Bank’s assessment on when economic slack is expected to be absorbed. Therefore, given that money markets are pricing in five rate hikes throughout 2022 and surprisingly a slight chance of a hike at this meeting (14%), the bar has been set high to surprise on the hawkish side, however, a hawkish surprise can be achieved if the Bank sees slack absorbed in Q1. Although, with no new forecasts or press conference, I suspect the Bank maintains current guidance and thus the Loonie will come under initial short term pressure. Additionally, with CAD buying picking up into the meeting, market participants are leaning on the bullish side, which in turn could exacerbate the short term pullback. As it stands, the option implied move for USD/CAD is at 62pips, therefore, a disappointment would likely see the 1.2700 handle come into play.With that being said, risk appetite and oil prices are likely to have a bigger role in determining the trajectory for the Canadian Dollar in the longer term.

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

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