CAD Volatility Incoming: BoC Rate Decision Tomorrow
It's been a choppy week for CAD already; since the start of the week, USDCAD has already swung 100 pips to the upside to the 1.3220s and then reversed back to lows today in the 1.3150s. Things have been choppy in markets more broadly given the fast approaching US Presidential election, but volatility is being exacerbated in CAD as market’s pre-position themselves ahead of tomorrow’s Bank of Canada meeting, which takes place at 1400GMT/1000EDT.
Tomorrow’s meeting will see a new set of economic forecasts released alongside the usual statement, which ought to see hefty upgrades given that the Canadian economy has held up significantly better than the Bank of Canada had expected when it released its latest set of forecasts back in July. Moreover, there will be a press conference with Governor Macklem and Deputy Governor Wilkins at 1515GMT/1115EDT.
Given that the bank is not expected to make any major changes to its current monetary policy stance (rates to be held at 0.25% and QE maintained at CAD 5bln per week), tomorrow’s meeting ought not provoke too much CAD volatility.
The bank is expected to maintain guidance that policy is set to remain highly accommodative until “until slack is fully absorbed”, while most analysts expect the bank to reiterate that asset purchases will continue at the current rate until the recovery is “well under way”.
TD Securities thinks there is a risk, however, that the bank might opt to go down the route of Yield Curve Control (YCC). However, given that the interest rate the Canadian government has to pay on its 30-year debt (indicated by yields in the secondary market for Canadian government debt) has only risen 0.22% since the July meeting (when the last set of economic projections were produced), whilst yields on 10-year Canadian debt are only up 0.13%, the need to imminent YCC to keep government borrowing rates in check is not too pressing.
However, TD Securities argue that Governor Macklem “has been proactive through the first three months of his tenure, and if the BoC concludes that YCC will ultimately be necessary in Canada, he may not wait for a sell-off” in Canadian government debt. The investment bank adds that when the BoC tweaked its forward guidance earlier on in the year to emphasise that it would not be raising rates for a long time, there was not too pressing a need to do so at the time, rather the BoC was just seeking to get ahead: they may apply similar thinking to YCC.
If the bank does decide to go down the route of YCC, this would be seen as slightly dovish, and would likely weigh on CAD, but would not represent a material change in the BoC’s policy stance.
Indeed, monetary tightening is a LONG way off for the BoC, just as is the case for the majority of other major global central banks. Inflation, which is currently running well below the BoC’s 2% target, will need to sustainably exceed 2% for any tightening to occur and the BoC do not forecast this occurring until 2022 earliest.
CAD traders of course will pay close attention to tomorrow’s BoC meeting, as always, but would do to remember that over the coming few days/weeks, CAD’s fate will mostly be determined by global themes such as the spread of Covid-19 and, arguably more importantly, the outcome of next week’s US Presidential election.
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