The Bank of Canada takes a hawkish turn as it tapers its quantitative easing program by more than the market expected.
One of this week’s most interesting economic events was yesterday’s Bank of Canada (BOC) monetary policy decision. As the market expected, the BOC became the first major central bank to announce a tapering of its quantitative easing program, starting with a C$1 billion reduction in the $4 billion/week pace.
Seasoned traders will remember that the taper tantrum in the United States in the aftermath of the previous crisis led to increased volatility in both the currency and stock markets. So, will the Canadian tapering trigger a similar move in the Canadian dollar pairs?
The BOC’s job was made more difficult because of the Canadian dollar’s strength during the pandemic. The Loonie dollar (as it is known) strengthened during the pandemic despite ongoing easing from the central bank. What will the Canadian dollar do now that the central bank prepares to unwind its easing?
The Bank of Canada’s Hawkish Statement
To the surprise of literally all market participants, the BOC decided to send a strong hawkish statement by tapering QE purchases and paring them back by one quarter. It’s not the first time the BOC has taken the market by surprise, having previously hiked or cut rates by more than the market anticipated.
The USD/CAD fell in the first minutes after the announcement, from 1.2650 to 1.2450. Remember that the Canadian dollar appreciated all the time the BOC eased, so yesterday’s reaction to the announcement somehow went against the trend.
The central bank also increased its growth projections for the years ahead, and market participants have already priced in two rate hikes during the next two years.
In summary, the rise of the Canadian dollar on a more hawkish BOC statement suggests a return to normality after the divergence we’ve seen during the pandemic.