Bank of Canada to stand pat before elections
Most central banks always like to be seen as not interfering in the political process. This can include offering overt views on government policy, referendums and of course elections. That said, banks will work closely with Federal governments on approaches to policy and their execution.
The Bank of Canada issues an updated policy statement on Wednesday while the first televised leader’s debate begins just ten hours after this, as the build up to the Canadian national election really picks up pace.
The central bank meeting will not produce any new forecasts as these are not due until late October. Suffice it to say that monetary policymakers also much prefer to announce any major changes at meetings with new economic projections.
Status quo for BoC
All things considered then, no changes are expected to policy.
The BoC has steadily tapered purchases in three stages, from “at least” $5b per week at the start to the current $2b per week. Governor Macklem and his colleagues are predicted to err on the side of cautious optimism while recognising some uncertainty over rising Covid case counts.
The bank will also acknowledge that the outlook has weakened after the disappointing second quarter GDP data. But recent strength in inflation, albeit driven by temporary factors, will support the current timeline of the output gap closing in the second half of next year.
Loonie driven by general risk sentiment
CAD has recently been driven by the broader USD outlook with the overall risk environment underpinning the recent dollar selloff. There’s no doubt the Bank of Canada has been one of the more hawkish major central banks. Indeed, going forward the bank may offer more support to CAD with the market expecting another round of tapering of asset purchases at its October meeting.
USD/CAD trading round the 200-day moving average
Late August saw this major spike higher to 1.2949. But a bearish “evening star” candlestick pattern emerged signalling the slowing down of upward momentum before the beginning of a new downtrend. Trendline support from the June lows has also been broken, though prices are trying to cling to the 1.26 level.
We are now trading around the 50-day and 200-day moving averages but still under a range of key supports. This tilts the technical picture towards a deeper retracement of the USD’s rebound from the June low near 1.201.
Targets below include the 50% Fibonacci retracement level of the 1.201/1.2950 June- August move at 1.24777 and the 1.23665 (61.8% retracement).