At its July policy meeting, the Bank of Canada did not make any waves. The decline to $2 billion per week was widely anticipated, and the Fed’s forward guidance on rates and future QE adjustments remained unchanged from June. Since CAD has been pricing most of these changes since April, there isn’t much new news on the BoC front. This reflects the majority of the USD/CAD surge following the news, implying a significant amount of front-running. According to economists at TD Securities, the loonie is likely approaching a fade threshold, but more patience is required on this front.” The BoC stayed on course, lowering its weekly GoC purchases from $3 billion to $2 billion and making only modest changes to its broader story. The Bank maintained its forward guidance, indicating that the economy has significant slack and promising to keep the overnight rate at the lower bound until the slack is absorbed in 2022H2. The forecast continues to influence QE decisions. We still expect the Bank of Canada to raise rates in October 2022, and we expect the GoC purchases to decline to $1 billion per week at the October 2021 interest rate announcement.”
“The Bank underlined increasing confidence in the economy in its policy statement, which was positive. Stronger inflation is still seen as temporary by the Bank, and GDP growth in 2022 has been upgraded significantly. At the same time, the BoC admitted a degree of uncertainty in its forecast at many points.”
“We believe the imbalances stem from CAD selling off in response to poor news rather than rallying more in response to good news throughout the summer. The external background is also important, as we believe that strong US data will begin to convert into a stronger USD, leaving the CAD vulnerable to the broader USD and risk sentiment. Markets are expected to attempt a retest of the 200-day moving average in the near future, but we don’t expect much more than that. As a result, the USD/CAD is likely approaching a fade threshold, but more patience is required on this front.”/n
