Trading the Bank of Canada Rate Meeting
One of the best trading opportunities this week in the FX markets could well come from the BoC meeting today. The CAD has been well supported recently on three main factors. Firstly, rising oil. The buoyant oil market has lifted all the petrocurrencies (CAD, NOK & RUB). Secondly, the excellent policy from Canada which provided for employers to keep employees on payrolls has meant that Canada has been one of the quicker countries to show a labour market recovery. Thirdly, the move higher in inflation have all increased expectations for action from the BoC today.
The base case
The base scenario is that the BoC reduce QE from CAD$2 billion per week to CAD1$ billion per week. This is pretty much expected. However, taking the look at the yield curve shows the front end moving sharply higher. The front end of the curve often moves higher on monetary policy expectations and the OiS curve is indicating three hikes for the BoC by the second half of 2022. Remember that at the last meeting, the BoC held rates at 0.25% and they see lifting rates around the second half of 2022.
The broad framework would look something like this:
- If the BoC fail to announce any reduction in QE and keep rate projections unchanged then expect CAD weakness. NZDCAD upside could be good or AUDCAD upside.
- If the BoC surprise markets with an early end to QE and revise rate projections to the first half of 2022 then expect CAD strength. CADJPY upside or GBPCAD selling could be good as the SONIA futures do look very stretched to the upside.