There is considerable uncertainty about what the BOC will do at the conclusion of its policy meeting on Wednesday. With all that’s going on with tariffs, news could drop at any moment that could shake up the markets. Combining these factors, we are looking at a really volatile week for the USDCAD.
The BOC has been on a prolonged easing streak as the Canadian economy underperforms. The slowing movement of capital puts the central bank at risk of undershooting its inflation target. And as the tariffs erect trade barriers with the nation’s largest trade partner, Canada could be staring down the barrel of a recession. A recession usually means desperate cuts by the central bank, but we’re not there yet.
When’s Takeoff?
In the days ahead of the pre-rate decision blackout, BOC Governor Tiff Macklem pulled back the curtain a bit on monetary policy. He told a gathering of businessmen in Ontario that he believed Canada had stuck the soft landing, but would remain on the tarmac for a long time. This is a more florid way of saying that even the central bank expected the economy to underperform at best, if not outright stagnate.
On the tariff front, he acknowledged a tremendous amount of uncertainty. But he did try to reassure participants at the meeting that the Canadian economy was unlikely to fall into a full-on recession. The problem is that it was before US President Donald Trump’s “Liberation Day” tariff announcement that seriously shocked the market. While Trump has given a 90-day pause to other countries except China, Canada and Mexico are embroiled in a particular tariff dispute of their own and won’t receive any immediate relief. And it appears that Prime Minister Mark Carney intends to take the tariff issue into the elections, as the Liberal party continues to gain in the polls ever since Trump announced the tariffs on Canada.
How Does it Affect Monetary Policy
The BOC has provided some mixed messages on tariffs. Macklem said that tariffs would lead to higher prices. This presumably implies the BOC will be less inclined to ease as it tries to fight off inflation. On the other hand, in the minutes of the last meeting, the bank said it wouldn’t have cut rates if it weren’t for the tariffs. So, it’s not clear if the trade situation will push or hold back the BOC on easing.
That uncertainty appears in the forecasts for the next meeting. The market is pricing in a 66% chance of a rate cut. But a recent Reuters poll showed that 60% of economists expect the BOC to hold rates unchanged at the meeting. Although, the economists acknowledged that the risk was to the downside, and concurred that two more rate cuts this year was the most likely scenario.
Market Reaction to the Timing
The issue might come down to timing, and that could mean the market doesn’t react all that much in the end. That is, if the BOC holds steady, but heavily implies a rate cut at the next meeting, it would probably be seen as a “dovish hold”. Or if it did cut, but left clear clues that there would be a pause at the next meeting, that would be seen as a “hawkish cut”. Both of those options leave interest rates at the same level in a couple of months.
But, given the uncertainty around tariffs and the election, the BOC might instead not provide much guidance for the next meeting. This would allow the market to fill in the blanks, with fear being the dominant emotion at the moment. That could allow for a stronger reaction as investors struggle to figure out what will come next.
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