The Bank of Canada (BoC) is anticipated to uphold its current policy rate at 5.0% for the fifth consecutive time, according to widespread expectations ahead of its upcoming policy meeting on Wednesday. The Canadian Dollar (CAD), which has experienced significant depreciation against the US Dollar (USD) since the beginning of the year, is closely watched in the market, particularly as the USD/CAD maintains a consolidative theme in the upper end of its range this week.
Despite the ongoing depreciation trend in the CAD against the USD, the BoC is likely to adopt a prudent approach, emphasizing the importance of evaluating incoming data and their sustainability before making any decisions on interest rates. This cautious stance aligns with the views of many G10 peers, including the Federal Reserve, ECB, Bank of England, and Reserve Bank of Australia, all of which emphasize a data-dependent approach.
The BoC is expected to maintain a conservative outlook on GDP growth, with a focus on assessing further data and potential risks. Governor Tiff Macklem’s comments in January highlighted the primary role of shelter prices in driving inflation above the target, and he emphasized the gradual journey toward achieving 2% inflation. The policy interest rate of 5% is viewed as necessary to subdue inflationary pressures, and discussions have shifted towards the duration of maintaining the current stance.
Recent reports suggest that economists anticipate a higher likelihood of the BoC delaying its first rate cut rather than implementing it sooner. Moreover, there is an expectation that the Bank of Canada might reduce the overnight rate from 5.00% to 4.75% in June, according to a majority of economists.
Analysts at TD Securities predict that the BoC will maintain the overnight rate at 5.00% and seek additional evidence that inflation is on track for a sustained return to 2%. The overall message is expected to remain cautiously optimistic, with a focus on avoiding overreaction to a single data point, such as the January CPI report.
The BoC will release its monetary policy decision at 14:45 GMT on Wednesday, followed by a press conference by Governor Macklem at 15:30 GMT. Barring surprises, the anticipated effect on the Canadian currency is expected to be minimal. A cautious decision might lead to a short-term, reflexive decline in USD/CAD, but the duration and magnitude are unlikely to be significant. The recent upward movement in the USD/CAD spot rate is attributed to the dynamics of the USD.
Pablo Piovano, Senior Analyst, notes that the gradual uptrend in USD/CAD since the beginning of the year may find reinforcement with a break above the key 1.3600 region. However, sellers regaining control could see temporary support at the 55-day SMA at 1.3428, with further weakness potentially leading to a move towards the December 2023 bottom of 1.3177.
