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Traders and investors are on high alert today, as the Bank of Canada meet to decide on interest rates and communicate to market participants their intentions for the ongoing bond purchasing programme, and the path for Canadian rates going forward.
Recent extremely positive data points from the Canadian economy makes it extremely difficult for the central bank not to act today. Market expectations are high alert, as they expect that the Bank of Canada could taper QE this afternoon.
This is setting up the Canadian stock market, and the Canadian currency, for plenty of volatility today as this would mark the first major hawkish move for a central bank since the start of the COVID-19 pandemic.
The Bank of Canada has significantly increased its balance sheet since the advent of COVID-19, as highlighted by the chart above. As COVID-19 infections wanes, and data points dramatically improve, today could the time for action.
Bank of America’s global research team believe that the Bank of Canada will not taper today, despite a major improvement in macroeconomic data points over the last month or so.
The bank notes “We expect the Bank of Canada (BoC) to present a significantly more constructive outlook for the Canadian economy on 21 April, but without changing its current monetary policy stance”.
I suspect the central bank will communicate to the market that if the data points they closely track remain on point, then the taper will begin as early as next month as Bank of America suggest. If they fail to mention a coming taper today, then I believe its sets the stage for a major market tantrum.
Still, it is going to be hard for the central bank to justify not spelling out their intention to taper, as unemployment plunges, job opening increased, and manufacturing PMI data reached decade highs.
Sticking with the theme of PMI data, last month’s reading marked the ninth straight month of expansion in the country’s factory activity, which grew at the fastest pace in the survey’s history.
The Canadian economy is also heavily dependent on oil. With a surge in oil prices going on, jobs in the sector have increased, which almost certainly boosted employment statistics.
The only yellow flag for the traders looking for ultra-hawkish commentary is the Canadian dollar. The Canadian dollar has been extremely strong against the euro and the greenback over recent months.
Strength in oil prices over recent months has caused the USDCAD pair to plunge to multi-year lows. Rising oil prices and Canada’s economic health are closely linked.
Potentially, the central bank will be nervous about becoming too hawkish and strengthening the Canadian dollar further. A strong exchange range can also have negative consequences for manufactures.
Overall, the major consensus today is for the Bank of Canada to lay the foundation for a coming taper, with mildly hawkish commentary. A taper today, or dovish language, with no hint of taper, is likely to shock market participants, and cause significant market volatility.
