A New Dawn at the Bank of Canada?
As yet another central bank replaces its Governor; more policy uncertainty is on the way.
BoC interest rate decision on Wed. 17th July at 10:00 ET / 15:00 GMT / 00:00 AEST
Boc Monetary Policy Report on Wed. 17th July at 10:30 ET / 15:30 GMT / 00:30 AEST
BoC Press Conference on Wed. 17th July at 11:15 ET / 16:15 GMT / 01:15 AEST
The incoming Bank of Canada (BoC) governor, Stephen Poloz has a tough task on his hands as he attempts to plot a policy course riddled with obstacles and uncertainty. The departing Mark Carney was keen to uphold a fairly hawkish stance despite a slowdown in Canadian GDP growth in 2012, so now it’s Poloz’s turn to take the hot seat and orchestrate future policy. Event risk is high and volatility will also spike as investors gauge what they can expect from Poloz in the years to come.
The BoC is expected to keep rates on hold at 1% for the 23rd consecutive time and release the highly anticipated Quarterly Monetary Policy report. Market focus will be on whether the incoming Poloz diverges from the policy path established by Carney. A recent comment from Poloz saying that the BoC is in “uncharted territory” has given CAD traders some anxiety because it could be a prelude to unprecedented policy changes and extreme market volatility. We expect rates to remain unchanged but a bias towards policy accommodation is likely in the commentary after the announcement.
Central bank policy in Canada is geographically/economically/politically/culturally linked the U.S. so despite wanting to maintain a broadly neutral/slightly hawkish stance, the BoC may have to submit and follow the Fed’s footsteps. Already, expectations of higher interest rates combined with higher bond yields on Canadian government debt are pushing the boundaries for the BoC. The addition of an uncertain economic outlook to may be all the BoC needs to appease the markets and provide dovish commentary at the scheduled press-conference. As we’ve mentioned in previous posts, ‘open-mouth’ operations will probably be the desired tool of choice for the BoC because of their proven success in recent weeks for the RBA, ECB, Fed and BoE. In today’s speculative times, verbatim is more influential than action – central bankers are now able to do less but achieve more.
We see two important factors that will play a part in driving BoC policy as well as driving speculative trade flows:
Revision to BoC’s GDP forecast – the rate of GDP growth expected by the BoC could be revised lower thus prompting calls for lower rates. In its previous Monetary Policy report the BoC forecast growth at 1.5% in 2013 and 2.8% in 2014. Speculators are already taking positions with expectations of a disappointing forecast so if a strong forecast is published, or one that simply confirms the status quo, significant CAD short unwinding will ensue.
Revision to Inflation forecast – if inflation is revised lower, it would make rate cuts more likely and thus weigh on CAD. BoC members have repeatedly stated that they’re concerned as much about inflation rising above target as they are about inflation falling below target. Considering that inflation has now dipped to 0.7% in May after remaining between 1%-3% since 1990, a forecast of inflation remaining below 1% would be significant and CAD negative.
Revision to BoC’s GDP forecast – the rate of GDP growth expected by the BoC could be revised lower thus prompting calls for lower rates. In its previous Monetary Policy report the BoC forecast growth at 1.5% in 2013 and 2.8% in 2014. Speculators are already taking positions with expectations of a disappointing forecast so if a strong forecast is published, or one that simply confirms the status quo, significant CAD short unwinding will ensue.
Revision to Inflation forecast – if inflation is revised lower, it would make rate cuts more likely and thus weigh on CAD. BoC members have repeatedly stated that they’re concerned as much about inflation rising above target as they are about inflation falling below target. Considering that inflation has now dipped to 0.7% in May after remaining between 1%-3% since 1990, a forecast of inflation remaining below 1% would be significant and CAD negative.
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| Canada's Inflation rate is close to record lows |
Overall, today’s BoC rate decision is the most highly anticipated in years because of the new Governor, diverging policy expectations amongst the G20, mixed economic outlook and uncertain future policy in relation to the U.S Fed. Expect severe CAD volatility, especially against JPY and USD.
Commissioned by Think Forex
Written by George Tchetvertakov
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