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Economists at TD Securities look for the Bank of Canada (BoC) to keep rates unchanged while maintaining a cautious tone in the October policy statement. The loonie should take its cue from the broad USD and risk sentiment. A cautious BoC and potential Yield Curve Control (YCC), alongside a long build and modest overvaluation suggests that the CAD has some ground to lose.

See – Bank of Canada Preview: Seven major banks expectations

Key quotes

“Hawkish (10%): Could have been worse. Economy has outperformed central scenario from July, large (2pp) upgrade to 2020 GDP, 2021 unchanged. A larger supply-side impact will pull forward closing of the output gap. Forward guidance and QE unchanged. GDP deceleration expected as the economy moves into recuperation, second lockdown still a tail risk. Monitoring financial stability risks. USD/CAD at 1.3130.”

“Base Case (60%): Not out of woods yet. Economy has outperformed the central scenario from July; a large (2pp) upgrade to 2020 GDP but 2021 downgraded. Statement flags more challenging recovery from here, fragile consumer and business sentiment. Forward guidance and QE unchanged. 1st stage of recovery better than expected, but rising COVID-19 infections a threat. Current outlook does not support expansion of stimulus/YCC, but QE can be calibrated in response to market conditions if needed. USD/CAD at 1.3220.”

“Dovish (30%): Enter YCC. Strong initial recovery in the rearview, next phase will be more difficult with COVID-19 infections rising. Fiscal policy supporting growth but low inflation/excess supply suggest more needs to be done. 1st stage of recovery better than expected but outlook for 2020Q4/beyond has deteriorated and inflation pressures remain muted. YCC to target either the 10 or 30-year point. USD/CAD at 1.3280.”