Will the Bank of Canada keep interest rates suspended for the third time in a row?
Here’s an event guide to their upcoming BOC policy decision.
Focus on the event:
Bank of Canada Monetary Policy Statement (BOC)
When will it be released:
June 7, 2023 (Wednesday): 2:00 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The Bank of Canada keeps interest rates unchanged at 4.50% again
- Policymakers stress that they are still willing to go higher if the data calls for it
Relevant Australian data since the last BOC statement:
🟢 Bullish Monetary Policy Arguments / Bullish Canadian Dollar
Monthly Canadian Gross Domestic Product It held steady in March rather than posting an expected contraction of 0.1%, which lifted the quarterly growth rate to 3.1% against a consensus of 2.5%.
April CPI Headline Advanced from 0.5% MoM gain to 0.7% gain versus expected 0.5% increase, CPI contraction and combined CPI slowed but still beat expectations
wholesale It rose 46% month-on-month in March versus an expected decline of 0.3%, following the previous decline which was raised by 1.4%.
Housing begins It increased from 214K to 262K in April against expectations of 221K, Building permits It increased by 11.3% on a monthly basis, compared to an estimated decrease of 2.3%.
Employment change in April It rose 41.4K vs. the estimate of 21.6K and the previous gain of 34.7K, which kept the unemployment rate steady at 5.0% instead of rising to 5.1%.
🔴 Arguments for dovish monetary policy / bearish CAD
Headline Retail Sales for the month of March Decreased 1.4% m/m versus an expected drop of 1.3%, after the previous decline of 0.2%
BOC Governor Macklem Speaking about the review of the financial system, he mentioned that he expects inflation to continue to decline in line with expectations
April Ivey PMI It decreased from 58.2 to 56.8 vs. 59.0 expected to reflect the slowing pace of industry growth
Previous editions and the impact of the risk environment on CAD
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 the 5.2% previously forecast 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.
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 mid-week boost when private inventory data revealed a sudden draw in inventories, but the associated Loonie failed to capitalize on the rally since BOC looked dovish.
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.
March 8, 2023
Overlaying the Canadian Dollar Against Major Foreign Currencies: 1-Hour Forex Planned by TV
Action / Results: The Bank of Canada kept interest rates unchanged at 4.50% as expected during the March decision, marking the first pause in tightening since the previous year.
Policymakers indicated that their decision to sit on their hands was due to estimates that inflation is likely to ease back to their 3% target this year. However, their statement indicated scope for further hikes down the line if needed.
The Loonie had a moderately bearish reaction to the announcement, as the prospect of BOC going off for some time already has been priced in. Still, the sell-off continued most days of the week, especially when the downbeat Canadian jobs data was printed.
Risk Environment and Intermarket Behaviors: Risk aversion was already in full swing early on, after the credit rating downgrade on Chinese economic data over the weekend.
It didn’t help that the US banking sector added a new set of uncertainties when SVB Financial Group collapsed. Crude oil was also in a weaker position due to slowing oil consumption in the US and Europe, which added to the weight of the pegged Canadian dollar.
price movement probabilities
Possibilities of feeling risky: Dollar dominance was in effect at the start of the week after another upbeat non-farm payroll report spurred the Fed to narrow hopes for June, but that tune quickly shifted after a weaker-than-expected update to the US ISM services PMI for May.
Without any further scheduled top-dollar events, we may see a slight mix of anti-dollar sentiment and broad risk-off sentiment, and the reaction to most global services PMI updates is likely to be lower than expected.
Canadian dollar scenarios
Base case: There is strong expectation of an “optimistic commentary” from the Bank of Canada this week, as inflation and housing data from Canada showed green signs last month. Some are even pricing in a 25% chance of a rate hike this time!
Note that the April rate statement stated that “demand continues to outpace supply and the labor market remains tight” but they needed some time to “assess if monetary policy is sufficiently restrictive and remain willing to raise policy rate further.”
BoC President Macklem’s testimony also indicated concerns about upside risks to price pressures, supporting the prospect that policymakers may choose to act more aggressively to bring inflation back on target soon.
The upbeat BOC statement could build up bullish momentum for the Canadian dollar, which is already benefiting from the gains in Crude Oil so far.
This could lead to a new bullish wave in front of their counterparts with central banks heading to a more dovish tone, such as the New Zealand dollar, or those that tend to be neutral to the hawks (the European Central Bank and the Reserve Bank of Australia).
However, risk sentiment will be a factor this week; Any sustained negative feedback is likely to cap CAD gains in the “hold bullish” scenario.
Alternative scenario 1: A decision to keep interest rates unchanged while hinting that they may remain on hold for a while longer could undo some of the Canadian dollar’s gains so far this week.
Policymakers can restate their forecasts of a sharp decline in price pressures, validating their decision to stand by until they see the numbers reflect a sustained rebound in inflation.
In that case, look for the Canadian dollar to give back some of its June gains, especially if the overall risk environment turns negative this week, a scenario in which the Canadian dollar could see the biggest drop in the short-term against “safe havens” like the Swiss Franc and the Japanese Yen.
Alternative scenario 2: An effective interest rate hike cannot be completely ruled out given the recent signs of steady inflation and resilience in the Canadian economy. This sudden move is likely to catch the markets by surprise, and will likely trigger a very bullish reaction from a whole host of players, including news, experts, and technical traders.
In this scenario, a short-term rally could be immediate as the Canadian dollar is likely to make most of the gains against currencies with a pessimistic or neutral tone, as mentioned in the base case scenario above.
