The Bank of Canada meets on Wednesday this week and the expectations and projections the BoC make will be important for the ongoing path of the CAD. So, let’s look at the basic expectations.
The Bank of Canada has clearly signalled that a hike is coming. On February 9 Governor Macklem stated that by signalling a clear intention to raise rates it hopes to assure people that inflation will come back down to target. This is in response to rising inflation which Governor Macklem stated they are seeing on a broader set of goods.
Inflation is elevated in Canada and sits in the middle of the G8 pack as illustrated by this helpful Financial Source chart below.
On February 05 Macklem stated that he was confident that inflation would come down, but expects it to remain close to 5% in H2. Macklem also qualified that statement by saying that inflation could come down even more quickly than forecast.
We can expect an update on what is happening regarding QT. Deputy Governor Lane said on February 16 that it will be quite likely for the BoC to say something about QT at this week’s rate decision. The last Bank of Canada meeting brought quantitative tightening into the foreground in Canada, as the Bank stated that it will consider “reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds” once it begins lifting rates. So, with rates expected to be lifted, it will be helpful to know the BoC’s mind on the pace of QT.
The market is pricing in around 6 rate hikes this year which seems far too steep. The risk here is that the Bank of Canada fails to deliver on these hawkish expectations and the forward projection will be crucial for market pricing.
The best tradable opportunity probably rests with the AUDCAD. If the BoC are less aggressive in terms of their future rate path then we could see some more AUDCAD upside as stale AUD shorts unwind further. . However, we must also keep oil prices in mind. Oil is Canada’s major export and the recent rise in oil has been supportive for the CAD. So, a more dovish outlook from the BoC on Wednesday + falling oil prices would offer the best opportunity for AUDCAD buying.