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CAD Risk Ahead: BoC Rate Decision Tomorrow




Current Bank of Canada Governor Poloz officially passes the reins onto incoming Governor Macklem at tomorrow’s meeting. As such, markets will pay close attention to any hints within the statement as to how Macklem's approach to policy might differ from Poloz's.


Most analysts, however, think that anyone hoping for any major policy changes at tomorrow’s meeting will be disappointed for two reasons; 


1) New Governor Macklem is unlikely to want to flip policy on its head within his first week in office. Typically, central bankers prefer a smoother approach. 




2) The BoC has already deployed the majority of its policy arsenal; lowering rates to their effective lower bound (ELB) at 0.25% and implementing a large scale asset purchase programme (QE programme) that is set up in a flexible way (weekly purchases have already increased significantly in size to as high as CAD 6.65bln with market’s getting overly excited). Moreover, the bank’s provincial and corporate bond-buying programmes are up and running. 


THE STATEMENT


TD Securities think that the statement itself is likely to be fairly short, with a heavy emphasis on uncertainty. “The Bank is likely to begin with a quick recap of recent economic developments, noting that GDP and employment fell sharply in Q1 and Q2, but they are likely to point to fiscal policy as a potential counterbalance,” they say. 


“Similarly”, continues TD, “we expect the Bank to say that credit easing measures and LSAP are having their intended effect in improving market functioning”. 


In terms of developments in the economy, early indications are in-line with the BoC’s less-pessimistic scenario (but still hugely negative) outlined in the April meeting’s economic forecasts. 


Regardless, the tone of the meeting is still going to be very pessimistic, and the forward-looking portion of the statement is likely to be constructed in a similar spirit to that of the April meeting (BoC is willing to adjust its programs going forward if needed and will pledge commitment to the inflation target). 


CAD


CAD has rallied hard in recent days, buoyed by 1) surging crude oil prices as Russia and OPEC+ move closer towards an agreement on an extension of the current output cuts and 2) on USD weakness (exacerbated most recently by US civil unrest). 


Given that no big changes to policy are expected at this meeting, CAD is unlikely to be particularly volatile. However, the meeting being Macklem’s first at the helm, there is always a chance of some “hiccups” as we have seen with other newbie Central Bank heads in the past (remember ECB President Lagarde saying its not the ECB’s job to close Eurozone inter-government bond spreads…).


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