BOC Up Next

The Canadian Dollar is looking strong this week heading into the March Bank of Canada meeting tomorrow. Firmer oil prices, rising yields and improved optimism linked to the vaccination effort there, have combined to turn sentiment firmly bullish on the Loonie. Going into the BOC meeting tomorrow, the risks appear skewed to the upside, with a more hawkish message from the bank likely to drive further appreciation for CAD.

Oil Prices Driving Exports Growth

Higher oil prices over recent months have finally started to be reflected in export revenues with Canada seeing much better than expected trade balance data in January with its trade surplus hitting a six-year high. Notably, the country’s trade surplus with the US was also seen making significant gains, hitting its highest level since October 2008. With oil prices recently hitting 28 months highs, the near-term outlook is strong for CAD as export growth is likely to continue to develop.

Growing Optimism

The BOC has maintained a fairly optimistic tone recently citing its forecasts for a solid economic recovery over 2021, despite the obvious uncertainties and downside risks which all central banks have to keep in mind. However, with the vaccination drive gathering further momentum, expectations of a sooner than expected rebound are starting to creep up. Parts of the country have already begun tentative reopening procedures, which look set to continue across Q2, fuelling expectations of a spending surge in Q2 and beyond. With the BOC having recently revised higher its inflation and growth forecasts for the year, the message this time around is likely to be one of further optimism.

BOC Wary of CAD Strength

The only real issue at this stage is the BOC’s concern over CAD strength. If the bank is too optimistic here, it risks fuelling a further rally in CAD, which could start to cause issues for the bank. With no monetary policy report at this meeting, the bank is likely to deliver a fairly curtailed assessment. However, in light of current conditions, traders will be looking for any clues that the bank might be considering tapering of asset purchases within the coming quarter which, if seen, would be firmly bullish for CAD.

Technical Views

CADJPY

The breakout above the lon- term bearish trend line is starting to really gather pace now. Price recently broke above the 85.20 level and is fast approaching the next key resistance at the 86.92 zone. For now, the momentum indicators supporting, the near-term bias is for a continuation higher and a breakout above 86.92 next.

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