• Joel

CAD Volatility Incoming: BoC Rate Decision Tomorrow

CAD has been hurting this week. Risk off in global equity markets (driven by a continuation of last week’s Tech sell off), combined with a big drop five-day drop in crude oil prices has driven USDCAD higher to just under the 1.3200 mark; WTI has slipped below $37.00/bbl  today from around $43.00 just last week on increasing concerns about faltering demand as global US covid-19 cases continue to rise, culminating in some of the world’s biggest producers cutting sales prices to their biggest export partners.

But CAD traders turn their focus tomorrow away from global themes, which typically tend to drive the majority of CAD price action, to domestic Canadian affairs; we have the Bank of Canada’s latest rate decision at 1500BST/1000EDT.

No major policy changes are expected, given that 1) they are not needed, as data since the last BoC meeting back in July has been better than expected and has revealed GDP is growing recovering faster than expected after Q2’s big slump and 2) the BoC will nonetheless want to be seen as eager to continue with their current, highly accommodative monetary policy stance until employment is well on its way back to maximum levels and inflation is back to target (as they have guided us); both of these metrics are still a long way off where the BoC wants them. Therefore rates will be held at 0.25%, and the BoC has not expressed any desire to take them into negative territory.

The most interesting aspects of this rate decision will thus be on 1) what the BoC says about average inflation targeting and 2) does the BoC offer any updated guidance on its bond buying programmes.

On this first topic; global central banks (of which the ECB and BoC are in focus this week) are being put under pressure by markets to emulate the Fed’s recent move to adopt average inflation targeting or AIT (this is where the Fed tries to average 2% inflation overtime, implying that after a period of soft inflation, like we are in now, the Fed will allow inflation to move above the 2% target for a time without tightening monetary policy).

The BoC is currently conducting a monetary policy framework review, as is the Fed. But unlike the Fed, the BoC’s review is not scheduled to conclude until December 2021 (the Fed’s finishes this year, and they have already pre-announced its main conclusion, AIT).

BoC member Wilkins recently told us that alternative inflation target policies under consideration include average inflation targeting (AIT), price-level targeting, an employment-inflation dual mandate, nominal GDP growth and level targeting, as well as raising the current 2% inflation target.

Markets are thirsty for information as to where the BoC is going to go. Could the BoC essentially reveal the outcome of its review more than one year early? Doubtful. But if it did, this could be CAD negative.

On the second topic; quite simply the BoC has tapered its purchases of bonds recently and allowed the size of its balance sheet to stabilise in recent weeks. Some see this as a potential signal that the BoC might be teeing up a shift to yield curve control, where a central bank does not actually have to buy too many bonds, but can still maintain low rates.

If the BoC does signal interest in going down this route, then this might also be seen as dovish and be CAD negative, though in reality, it is just something that would make sense and isn’t really a reflection of the BoC turning any more dovish than they were before. 

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