BOC Holds Steady
The Canadian Dollar remains under pressure into the back end of the week following yesterday’s September BOC meeting. While expectations were largely muted ahead of the event, bulls were nonetheless disappointed with the BOC’s decision to keep policy on hold. The BOC has tapered twice this year and has signalled its intention to continue tapering ahead of raising rates next year. However, the bank opted to pause its policy normalisation for now, citing fears over a fourth wave of the pandemic which threatens the economic recovery underway in Canada.
The statement issued alongside the decision noted that while the recovery is expected to continue, “The governing council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support.”
GDP Weaker-Than-Expected
These comments come on the back of last week’s GDP release which revealed that economic activity contracted at by 1.1% in Q2, and is forecast to contract by 0.4% in July (first month of Q3). The Q2 contraction was deeper than the bank forecast with the BOC attributing the decline to “a contraction in exports, due in part to supply chain disruptions, especially in the auto sector.”
Fourth Wave Fears
With the country now facing a rising fourth wave of the virus and increasing numbers of the Delta variant, the BOC is proceeding with caution, similar to what we have heard from other central banks. As a result of the uncertainty posed by the fourth wave, the BOC noted that “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery.”
Rates To Rise H2 2022
Looking ahead, the BOC noted that it expects to maintain policy rates at current levels until the bank’s 2% inflation target is achieved in a sustainable way, which it expects to happen to by second half 2022. Currently the bank notes that CPI inflation is sitting above 3% as a result “base-year effects, gasoline prices, and pandemic-related supply bottlenecks” though noted it expects these effects to be transitory.
Technical Views
CADJPY
The recovery higher in CADJPY has stalled into a test of the bear channel top with price subsequently turning lower again. With indicators turning lower here, the focus is on a continuation of the bear trend and a break of the 86.10 level, targeting a return to 84.64 level lows.
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