Do you know what is better for volatility players than an interest rate decision?
A policy declaration where the markets are not 100% sure of the outcome!
What exactly are the markets you can expect from BOC and the possible pricing scenarios for this event? Read about the points you need to know!
Focus on the event:
Bank of Canada Monetary Policy Statement (BOC)
When will it be released:
July 12, 2023 (Wednesday): 2:00 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- Bank of Canada raises interest rates by 25 basis points to 5.00%
- Policymakers stress that they are still willing to go higher if the data calls for it
- The BOC will also publish its quarterly report monetary policy report With the latest growth, inflation and risk forecasts
Relevant Australian data since the last BOC statement:
🟢 Bullish Monetary Policy Arguments / Bullish Canadian Dollar
retail In April 2023: +1.1% m/m (+0.2% m/m expected; -1.5% m/m previously); Core retail sales were +1.3% m/m (+0.2% m/m expected; -0.4% m/m prior)
The new home price index For May: +0.1% m/m (-0.2% m/m expected; -0.1% m/m previously)
Canada added 60,000 jobs in June (expected 5k; -17.3k ex); the Unemployment rate It increased from 5.2% to 5.4% as more people looked for work
Ivy PMI For the month of June: 50.2 vs. 53.5; Employment Index: 57.6 vs. 56.2 previously; Price Index: 60.6 vs. 60.3
🔴 Arguments for dovish monetary policy / bearish CAD
Industrial PPI For May: -1.0% mom versus -0.6% mom in April; The raw material price index fell -4.9%m/m vs. +1.8%m/m in April
CPI For May: 3.4% YoY (3.6% YoY expected; 4.4% YoY); On a monthly basis: 0.4% MoM (0.5% MoM expected; 0.7% MoM)
in Quarterly forecast surveyThe Bank of Canada said that consumers and businesses expect improvements in inflationary conditions and demand for goods and services
S&P Manufacturing PMI for June: 48.8 vs. 49.0 in May; slumping market demand as customers delay spending decisions (most likely due to higher interest rates and macroeconomic uncertainty); modest rise in input costs; “Firms, on average, have chosen to reduce their staffing levels“
Previous editions and the impact of the risk environment on CAD
June 7, 2023
CAD overlay chart against TV majors Planned by TV
Action / Results: After keeping interest rates steady in the March and April meetings, the Bank of Canada surprised markets with its first rate hike since January. The central bank raised key interest rates by 25 basis points to 4.75% instead of stopping at 4.50% as markets had expected.
In his statement, BOC members indicated their concerns about rising inflation.Could be materially stuck above the 2% target“In addition to their belief that their previous policies were not”restrictive enough” just yet.
The sudden (and hawkish!) rate hike, which came a day after the Reserve Bank of Australia raised its interest rate, boosted the Canadian dollar sharply during the US session and ended the day not far off its intraday highs.
Risk Environment and Intermarket Behaviors: The release of a weaker-than-expected ISM Services PMI in the US and disappointing trade data from China made it difficult to keep risks elevated throughout the week.
“Risk” bets such as Crude Oil, Aussie and Canadian Dollars popped higher in specific headlines such as stronger oil demand data and aggressive hikes by the Reserve Bank of Australia and the Bank of Canada in interest rates. Even then, assets quickly lost ground and fell in line with the overall risk-averse trade environment.
April 12, 2023
Overlaying the Canadian Dollar Against Major Foreign Currencies: 1-Hour Forex Planned by TV
Action / Results: The Bank of Canada kept its key interest rate unchanged at 4.50% in April, with policymakers expecting inflation to slow sharply to around 3% by the middle of the year, down from a previous forecast of 5.2% in February.
However, Governor McClim still maintains that he is unlikely to cut interest rates in the near future.
However, the Canadian dollar had a bearish reaction to the report, with traders likely adjusting positions to account for a much longer tightening pause. The Canadian dollar fell upon the release of the report and saw a slight decline before ending the day lower than its major peers.
Risk Environment and Intermarket Behaviors: Risky assets actually started the week on a strong footing, as market players seemed to be pricing in low odds of a rate hike from major central banks.
Crude Oil got a boost in the middle of the week when inventory data revealed a sudden drawdown in inventories. However, the linked Loonie failed to capitalize on the rally since BOC looked cautious.
Soon after, risk-off flows returned and dragged the commodity currency further south, as downbeat US retail sales data kept global recession fears in play.
price movement probabilities
Possibilities of feeling risky: Much like the June release, market players start the week in a cautiously upbeat mood as the end of the Fed’s tightening cycle approaches as well as their optimism about upcoming earnings reports.
Meanwhile, print data such as Friday’s US non-farm payrolls report and Chinese inflation numbers today are reminding traders of the higher interest rate environment and the possibility of slower growth.
Canadian dollar scenarios
Base case: Traders believe that the Bank of Canada (BOC) will not stop at one rate hike after stopping for two consecutive meetings.
For one thing, the June jobs data and Ivey PMI reports point to labor market tightening much sharper than the inflation decline we saw in May. Meanwhile, the latest BOC Business Survey stated that businesses and consumers expect inflation conditions for goods and services to improve.
If the Bank of Canada executes a “hawkish rally” as traders price in their optimism towards the end of the Fed’s rate hike cycle, the Canadian dollar could see gains against its non-hawkish peers. CAD can earn vs American dollarand JPY, AUD, and NZD.
Alternative scenario 1: If the Bank of Canada raises interest rates but hints at another pause, the Canadian dollar could give up some of its gains in the US or Asian trading sessions.
The Canadian dollar may lose some points against currencies with more hawkish central banks such as the euro and the pound, but it will maintain its gains against other currencies such as the US dollar, the Japanese yen and the Australian dollar.
Alternative scenario 2: The Bank of Canada could pull off another surprise, this time by pausing rate hikes.
Since some traders have already priced in a rate hike, a sudden halt in rate hikes could drag the Canadian dollar against safe havens such as the US dollar, Japanese yen, Swiss franc, and even currencies with loose central banks such as Australian dollars And New Zealand dollar.
