Will the Bank of Canada keep rates on hold for the third time in a row?
Here’s an event guide for their upcoming BOC policy decision.
Event in Focus:
Bank of Canada (BOC) Monetary Policy Statement
When Will it Be Released:
June 7, 2023 (Wednesday): 2:00 pm GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
- BOC to keep interest rates unchanged at 4.50% again
- Policymakers to reiterate that they’re still willing to hike if data calls for it
Relevant Australian Data Since the Last BOC Statement:
? Arguments for Hawkish Monetary Policy / Bullish CAD
Canadian monthly GDP stayed flat in March instead of posting the projected 0.1% contraction, bringing quarterly growth rate to 3.1% vs. the 2.5% consensus
Headline CPI for April advanced from a 0.5% monthly gain to a 0.7% increase versus the projected 0.5% uptick, trimmed CPI and common CPI slowed but still beat forecasts
Wholesale sales surged 46% month-over-month in March vs. projected 0.3% dip, following earlier upgraded 1.4% decline
Housing starts rose from 214K to 262K in April vs. 221K forecast, building permits rose 11.3% month-over-month versus estimated 2.3% drop
Employment change in April rose 41.4K vs. 21.6K estimate and previous 34.7K gain, keeping jobless rate steady at 5.0% instead of rising to 5.1%
? Arguments for Dovish Monetary Policy / Bearish CAD
Headline retail sales for March slumped 1.4% month-over-month versus projected 1.3% decline, following earlier 0.2% dip
BOC Governor Macklem in a speech about the Financial System Review mentioned that he expects inflation to keep coming down in line with forecasts
April Ivey PMI dipped from 58.2 to 56.8 vs. 59.0 forecast to reflect slower pace of industry growth
Previous Releases and Risk Environment Influence on CAD
April 12, 2023
Overlay of CAD vs. Major FX: 1-Hour Forex Chart by TV
Action / results: The BOC kept its main interest rate unchanged at 4.50% in April, with policymakers projecting inflation to decelerate sharply to around 3% by mid-year, down from earlier 5.2% forecast in February.
However, Governor Macklem still maintained that they’re unlikely to cut interest rates in the near future.
Even so, the Loonie had a bearish reaction to the report, as traders likely adjusted positions to account for a much longer tightening pause.
Risk environment and Intermarket behaviors: Risk assets actually started the week on strong footing, as market players seemed to be pricing in lower odds of interest rate hikes from the major central banks.
Crude oil even got a midweek boost when private inventory data revealed a surprise draw in stockpiles, but the correlated Loonie failed to benefit from the rally since the BOC sounded cautious.
Soon after, risk-off flows returned and dragged the commodity currency further south, as downbeat U.S. retail sales data kept global recession fears in play.
Mar. 8, 2023
Overlay of CAD vs. Major FX: 1-Hour Forex Chart by TV
Action / results: The BOC kept interest rates on hold at 4.50% as expected during their March decision, marking their first tightening pause since the previous year.
Policymakers noted that their decision to sit on their hands was due to estimates that inflation is likely to fall back down to their 3% target this year. Still, their statement indicated scope for more hikes down the line if needed.
The Loonie had a mildly bearish reaction to the announcement, as the likelihood of a BOC pause was priced in for quite some time already. However, the selloff persisted for the most part of the week, especially when downbeat Canadian jobs data was printed.
Risk environment and Intermarket behaviors: Risk aversion was already in play early on, following downgrades to Chinese economic data over the weekend.
It didn’t help that the U.S. banking sector added a fresh set of uncertainties when SVB Financial Group collapsed. Crude oil was also on weaker footing due to slowing oil consumption in the U.S. and Europe, putting more weight on the correlated Canadian dollar.
Price action probabilities
Risk sentiment probabilities: Dollar domination was in play to start the week following another upbeat NFP report that spurred Fed tightening hopes for June, but that tune quickly shifted after a weaker-than-expected U.S. ISM Services PMI update for May.
And without any further scheduled top tier events for the Greenback, we may see a little mix of both anti-dollar vibes and broad risk-off vibes, likely a reaction to most global services PMI updates coming in below expectations.
Canadian Dollar scenarios
Base case: There are strong expectations for a “hawkish hold” from the BOC this week, as inflation and housing data from Canada showed green shoots in the past month. Some are even pricing in a 25% chance of a rate hike this time!
Note that their April rate statement mentioned that “demand is still exceeding supply and the labor market remains tight” but that they needed some time to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further.”
Testimonies from BOC head Macklem also pointed to concerns about upside risks to price pressures, supporting the odds that policymakers might opt to act more aggressively to bring inflation back to target soon.
An upbeat BOC statement could pile on the bullish momentum for the Loonie, which is already taking advantage of crude oil rallies so far.
This could lead to a fresh wave higher against its counterparts with central banks going for a more dovish tone, such as NZD, or those with a neutral-to-hawkish tilt (ECB and RBA).
Risk sentiment will be a factor this week, though; any continued negative vibes will likely limit CAD rallies in the “hawkish hold” scenario.
Alternative Scenario 1: Deciding to keep rates unchanged while hinting that they could stay on pause for much longer could undo some of the Loonie’s gains so far this week.
Policymakers could reiterate expectations of a steeper decline in price pressures, which validates their decision to stand pat until they do see the numbers reflecting a sustained pickup in inflation.
In this case, look for the Loonie to give back some of June’s gains, especially if the broad risk environment is leaning negative this week, a scenario where the Loonie may see it’s biggest short-term declines against the “safe havens” like Swiss Franc and Japanese yen.
Alternative Scenario 2: An actual rate hike is something that cannot be totally ruled out given recent signs of sticky inflation and resiliency in the Canadian economy. This surprise move would likely catch the markets off guard, likely sparking a very bullish reaction from the whole spectrum of players, including news, algo, and technical traders.
In this scenario, a short-term rally may be immediate with the Loonie likely making the most gains against currencies with a dovish or neutral tone, as mentioned in our Base case scenario above.
