Quick refresher

Going into the BoC meeting the expectations were for a more bullish outlook. However, the concern at the start of last week was that rising COVID-19 cases in Canada would cause a so-called ‘dovish taper’. This was that the BoC would reduce bond purchases, but somehow talk down the CAD. It’s funny the knots that we can tie ourselves in trying to understand coming moves!

The event

In the event, the BoC was more hawkish than expected. These were the main bullish headlines:

  • Bond purchases reduced by $1 billion per week to $3 billion.
  • Interest rate rises brought forward to 2022 from 2023.
  • GDP forecast increased to 6.50% in 2021.

A few things to note

Firstly, the BoC was under some pressure to cut asset purchases as the central bank now owns more than 40% of outstanding bonds. Macklem said that if the BoC owned 50% that could have unsettling market consequences. So, in that sense, a taper was needed. This does not take away from the bullish message but provides some context for it.

The BoC is keeping a close eye on the housing market, as are most other central banks. They won’t want to get involved with controlling this, but if the BoC do then that will be a tailwind for CAD.

Further adjustments to the QE program are set to be gradual.

The whole outlook rests upon the vastest COVID-19 spread. So, it goes without saying, but that can be a drag on CAD strength expectations going forward.

What does it mean?

The BoC is the first central bank to signal that it will be exiting its stimulus package. This is a tailwind for CAD.

Which pairs to trade

The medium-term outlook for the USD remains bearish for now, so USDCAD shorts would be reasonable looking to fade rallies. An argument can also be made for CADCHF and CADJPY longs as the global recovery hopes should mean oil finds dip buyers (supporting CAD) and both the SNB and BoJ both have a very loose monetary policy.