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Next week, the Bank of Canada will have its policy meeting. No change in rates is expected by some announcements regarding the purchase program seems likely. Analysts at CIBC, point out the Bank of Canada has the intention to restrict itself to some fine-tuning, and avoid any major shifts in a monetary policy stance that is working well, in an economy that isn’t.

Key Quotes: 

“If we’re on the mark, and the MPR doesn’t alter expectations for the timing of rate hikes, and the BoC limits the QE changes at this announcement to truncating the eligible basket of QE purchases, that’s not likely to prompts a sustained move in spot CAD, or in the options market on its own.”

“The market has been keenly aware that the composition and size of the Bank’s balance sheet has been shifting for months. For the composition, the story has been about the reinvestment of maturing bills and repos into the longer-dated bonds.”

“Over the next few months, the shift from bills to bonds on the Bank’s balance sheet means that more supply of the former is available to the market, which does pressure bill yields higher. And we know that price action for the CAD has been more sensitive to this than moves further out the curve. For now, that could
allow the Canadian dollar to hang on to recent gains, despite evidence of a slowing in growth that we expect to emerge in the coming months.”

“We expect that price action should remain contained within the 1.30-1.34 area over the coming months. On the crosses, the Bank’s shift should continue to promote CAD strength — especially against traditional peers in the commodity currency space (AUD and NZD).”

“We see the Bank of Canada taking pains to push against the market’s current expectation that it will hike ahead of the Fed. That should see the Canadian dollar underperforming, but that’s a story for 2021.”