Bank of Canada Preview

Tomorrow (Wednesday) at 15:00 we will get the BoC rate decision where rates are expected to remain on hold at 0.25%. What will be much more important will be the pace of asset purchases and whether we get any commentary to indicate a move to greater hawkishness or dovishness. 

You may have read my blog post with a SELL AUDCAD recommendation. 

SELL AUDCAD: Entry 0.93090, TP 0.91461(1.7%), SL 0.94300 (-1.3%)

As outlined then, I am relatively bullish on the CAD given the BoC is already one of the most hawkish Central Banks in G10 and should be ready for liftoff in mid-late 2022. This is shown in the chart below (Terminal function WIRP <GO> for those interested). 

Source: Bloomberg 

Recent economic data also points to a more hawkish slant for the BoC with CPI data rocketing higher in the August reading to 3.7% YoY from 3.1% the month before. Sure, the usual transitory narrative will be spun, but we are getting to the point of potential discomfort for central banks around the world. 

Admittedly, GDP numbers released August 31st were much more bleak and showed a Quarterly decline of 1.1% annualised much to the markets surprise. Nonetheless, I think the bigger issue for the BoC is the rising inflation and the growth concerns can likely be marked up as a one-off. In the run up to the October meeting, there will be another slew of data which will likely provide a lot more information on the economy. 

Overall then, I don't expect much excitement from the meeting tomorrow. The only thing to watch is whether we get any significant dovish or hawkish commentary, but for now I expect the BoC to keep its rhetoric largely unchanged. With an election running in the background, this is further evidence that the right thing to do now is wait until a more clear picture has emerged. At the next meeting in October, perhaps we will see another slowing of QE purchases.

NET NET: What is the trade? 

Despite the likely damp squib nature of the meeting tomorrow, I maintain my Sell AUDCAD position. The increased dovishness from the RBA today is likely to continue as their lockdowns extend. Canada has a distinct advantage in its vaccination progress and this means the economic recovery should be more resilient. 

As I said with the RBA, I would be hesitant to put any outright USDCAD trades on given the continued USD risk. But, my bias would be to short USDCAD, this is primarily based on the market expecting relative dovishness off the back of that GDP number already. So the risk to me is that they are more hawkish than expected.