CAD: More insurance from BoC? – Rabobank

FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the investors have drawn similarities between the economic backdrop this year and last and speculation of a rate cut at today’s policy meeting have spiked higher during the past couple of weeks.

Key Quotes

“Expectations for and against a BoC rate cut this afternoon are now fairly evenly balanced.

Almost irrespective of the policy decision that the Bank of Canada makes this afternoon, the current heightened levels of uncertainty about the direction of policy argues the case of a step up in the forward guidance offered by the Bank.

Since market speculation about the outcome of today’s policy meeting is split, there is risk that the announcement will have a heavy impact on the CAD. By expressing a very dovish bias the BoC could potentially limit CAD gains on any decision to leave rates on hold. Alternatively guidance could nip in the bud any speculation that a rate cut today could lead to further moves later in the year.

Although we see risk that several major central banks could extent their easing bias in the coming months, on balance, we expect the BoC to leave policy on hold. While it is clear that the energy producing parts of the country remain under pressure, there are also signs that the weakness in the CAD is lending support to some sectors of the economy.

The CAD was the weakest performing G10 currency during 2015 and the economy has the additional benefit of some modest fiscal stimulus in the pipeline. Additionally, the Bank has pointed to the highly leveraged household sector as having created vulnerabilities for the economy. Although macro-prudential measures are in place, the BoC would risk further exacerbating household debt levels by cutting rates further.

While we do expect steady rates today, the BoC is likely to downgrade its forecast for economic growth this year. This could take the place of forward guidance by allowing the market to infer that the door has been left open for further easing later in the year. Thus while steady policy may lead to a round of short-covering in the CAD, we would any recovery to be limited. As long as oil prices remain under pressure the CAD will remain vulnerable and we remain sellers on rallies.”

Jane Foley, Research Analyst at Rabobank, suggests that the investors have drawn similarities between the economic backdrop this year and last and speculation of a rate cut at today’s policy meeting have spiked higher during the past couple of weeks.

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