Earlier, the USDCAD hit a 6-year record high, as attention turns to what the BOC will do at their meeting tomorrow.
However, the consensus appears to be that the loonie isn’t moving higher so much because of domestic issues, but because of a weaker greenback. So, it might be the case that the CAD is getting stronger despite what the Bank of Canada could do.
Since the last meeting, Canada has had a series of mixed economic data. This is unfortunate for analysts trying to project what the BOC will do. The big question now is when they will start to reduce their asset purchases.
Where everyone agrees
Naturally, there is a solid consensus that the interest rate will stay the same. Current projections are for rate lift off late next year, in line with the BOC’s statement to keep rates unchanged until then.
But that doesn’t mean the markets can’t get riled up over other policy issues, such as when the BOC will taper.
The most populous province, Ontario, recently brought forward their reopening schedule. This suggests that the decline in cases and economic normalization is (slightly) ahead of schedule.
On the other hand, Canada’s dependence on their southern neighbor’s economy was thrown into stark relief following the somewhat disappointing jobs data on Friday.
Where the disagreement lies
Generally, analysts agree that the BOC is likely to taper “soon”. But what “soon” means is still up for debate. There is about a 50-50 chance of the BOC announcing that they will slow down the pace of their bond purchases starting with the next meeting.
Others suggest that the BOC could not only signal that another taper is not coming at the next meeting but downgrade their economic outlook given the trade scenario.
The yield on Canadian debt has been rising with a progressively steeper curve, as investors factor in expected increases in inflation.
Given the lack of consensus, it wouldn’t be surprising to get a stronger reaction in the CAD, regardless of the outcome. Should the BOC confirm they are looking to taper at the next meeting, or even just keep their current outlook stable, we could see the Loonie pushing higher.
On the other hand, there appears to be enough expectation of a taper in the near term, that if Governor Poloz provides a more downbeat tone, the Loonie could retrace from the record highs.
The other elements to consider
Crude has been on the rise, with the best prices since late 2018. Naturally, this supports the Canadian dollar. However, the increased cost of energy might give the BOC some concern when it comes to the economic recovery.
The bottom line is that the central bank is still in supportive mode, and has yet to signal that they see the economy out of the woods.
So, it’s unlikely we’ll see any significant dialing back of stimulus.
Join our responsible trading community - Open your Orbex account now!
