ECONOMIC DATA: Since the December meeting, economic information has been marginally better than expected. The BoC’s Business Outlook Survey reported on growing optimism amid the announcement of effective vaccines. Though it is worth keeping in mind, the survey period was Nov 10-Dec 1 and therefore before greater lockdown measures. Elsewhere, the monthly GDP (Oct) figure climbed 0.4 percent, printing before expectations of 0.3%. However, with Canada back under strict lockdown measures, the focus is less on how the market performed at the conclusion of this past year and rather more on the way in which the economy will be impacted in Q1 2021. The labor market has been somewhat mixed with the latest reading showed a contraction in jobs created (-62per cent ). That said, this had been solely because of the contraction from part-time employees, while full-time occupations created saw a marginal increase.
MPR OCTOBER ASSUMPTIONS
Brent near $40 (Currently $55)WTI close to $40 (Presently $52)WCS near $30 (Currently $41)
Oil prices have surged 40% since the October MPR assumptions with an increase because the December meeting. Subsequently, while the short-term outlook is very likely to signify tough lockdown measures, H2 2021 will be somewhat wealthier with the rollout of this COVID vaccine a contributing factor for optimism.
CAD STRENGTH: With the Canadian Dollar trading about multi-year highs against the greenback and the CAD TWI at circa 3-year highs. Loonie strength has become a subject of discussion once more for the Bank of Canada with both the Governor and Deputy Governor creating a mention about the exchange rate.
However, while a more powerful CAD may indeed twist financial conditions, appreciation in the currency has largely resulted from a softer US Dollar. Therefore, more stimulation might have little impact in changing the trajectory in CAD against the USD. Therefore, an effort to curtail the Loonie may stem from a reiteration of recent rhetoric in the post-decision press conference. Obviously, the current position in the policy statement is that”a broad-based decline in america exchange rate has led to a further appreciation in the Canadian Dollar”.
MARKET REACTION: A decision by the Bank of Canada to maintain current policy, might observe a slight downtick at USD/CAD given the small risk of a micro-cut, however, the move is likely to be marginal at best as a micro-cut is quite improbable. Rather, focus will be on the corresponding statement and Governor Macklem’s press conference. Therefore, a sign that policy will stay on hold for the foreseeable future regardless of the current lockdowns could be enough to result in some small move lower in USD/CAD. But, talking down of the money could observe any moves lower in USD/CAD quickly retraced. According to the option markets, the implied movement is at 0.45%, which can be marginally elevated given the current USDCAD reaction to BoC meetings. Elsewhere, heading into the meeting, quick cash accounts (leveraged funds) are slightly short the Canadian Dollar (bullish USD/CAD), consequently a more positive statement from the BoC could observe a more outsized movement on the disadvantage.
