The Bank of Canada's rate decision but, more importantly, its forward guidance could reinforce the medium-term bullish outlook for the Canadian dollar[1].
CANADIAN DOLLAR OUTLOOK:
- The Bank of Canada will announce its March monetary policy decision tomorrow
- Investors expect the central bank to raise the overnight rate by 25 basis points to 0.50% to tackle soaring inflationary pressures
- The market has fully discounted a 25 basis point rate hike, so BoC’s forward guidance will be more important for USD/CAD[2] price action
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USD[4]/CAD is virtually flat on Tuesday, moving between small gains and losses around the 1.2700 psychological level amid market angst ahead of the Bank of Canada's monetary policy announcement [5]due tomorrow. Investors expect policymakers to raise the overnight rate by 25 basis points to 0.50% to counter red-hot inflation, which reached a thirty-year high of 5.1% y/y in January, well above the target range of 1% to 3%.
The move has been discounted and is fully priced in the curve, so it will be a non-event in and of itself, so traders should focus on forward guidance and the overall tone to determine whether the tightening cycle will be aggressive or shallow this year.
BoC may appear somewhat cautious in light of the crisis between Russia and Ukraine[6], but the institution will not pivot or panic, as the ongoing military conflict is not expected to have a major effect on the global recovery. The bank is also likely to reiterate that economic slack has been absorbed and that the trajectory of consumer prices is skewed to the upside on account of supply chain snugs and
