HomeBank of Canada Preview – More Tapering Ahead

Bank of Canada Preview – More Tapering Ahead

1.20 in focus for the USD/CAD pair as the Bank of Canada is due to announce its interest rate decision. Tapering may be postponed to July, as high inflation offsets a weak labour market.

The Bank of Canada is the first out of three major central banks to announce their monetary policy decisions in one week’s time. After today’s decision, the European Central Bank follows tomorrow and the Federal Reserve next Wednesday.

As market participants are waiting for these events, volatility in the currency markets remains subdued in the first two days of the trading week. For example, during yesterday’s London trading session, the EUR/USD currency pair moved in a ten pip range for several consecutive hours.

The USD/CAD also holds a tight range ahead of the Bank of Canada’s decision. The 1.20 level looms large as the central bank is in pole position to tighten. A much faster vaccination campaign fuels the economic recovery, and the Bank of Canada looks poised to react to the new developments.

More Tapering During Summer Months

The Bank of Canada’s decision today may be to remain on hold at today’s meeting, considering the implications of the last relevant economic data. For example, the February GDP contracted at 2.2% on an annualised basis, and the April net change in employment showed a 207k jobs loss. These two are enough to trigger a postponement of the tapering process, but one should not be surprised if the central bank does act today.

Inflation is a reason. More precisely, rising inflation.

The April Consumer Price Index came out at 3.4% YoY, a hawkish development. Also, Retail Sales, as well as the GDP, showed significant improvements in March – the former grew by 3.6% while the latter by 6.6%.

While the employment data since the last Bank of Canada meeting is dovish, the inflation data is hawkish. If one offsets the other, we may see a no-change from the central bank today.

But the Bank of Canada is known for not being shy in surprising the market participants. Even if it decides to stay on hold today, it may signal that it will announce a tapering resumption at its July 16th meeting. If that is the case, the markets will move in anticipation, with the 1.20 level looming large for the Canadian dollar.

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