BOC Says Recovery Beating Expectations

The September Bank of Canada meeting, held yesterday, passed as expected, with the BOC holding rates unchanged. BOC governor Tiff Macklem reaffirmed the bank’s commitment to keeping rates at current levels until the slack in the economy has been absorbed and the bank’s 2% inflation target has been “sustainably achieved”.

Bond Purchases To Continue

Along with the pledge to keep rates at current record lows of 0.25% the BOC governor also reassured markets that the bank’s bond purchase operations will continue at the current pace in a bid to help the country progress through what the BOC calls the “recuperation” stage of the economic recovery. While much of the bank’s message was largely unchanged from its last update in July, the BOC did make some changes as it signalled readiness to adjust its bond buying operations lower if necessary.  On this point, the BOC noted that bond purchases will be “calibrated” as necessary. Furthermore, language in the statement indicated readiness to provide more stimulus if required was also removed. While subtle, these changes indicate a shift in the BOC’s perspective. There has been a great deal of attention recently on the fact that the BOC’s bond purchases are potentially too aggressive, and it appears now that the BOC is looking to address this. However, there is no indication of a time-line yet.

Recovery Outpacing Forecasts

In terms of the Canadian economy, the BOC noted that the recovery in Q3 is happening at a quicker pace than expected though noted that business confidence and investment remains “subdued”. In terms of looking ahead, the BOC statement noted: “While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”

The key question for the BOC now will be how to scale back the level of its bond purchases without damaging investor confidence. One train of thought on this is that the BOC will look to implement a BOJ-style yield curve control target where it aims to keep medium-term interest rates around a certain level meaning that bond purchases would be as needed and not pegged to a specific quota. With this in mind, traders will now be looking to BOC governor Tiff Macklem’s speech later today for any further insights into the BOC’s strategy.

Technical Views

USDCAD (Bullish above 1.3332)

From a technical viewpoint. USDCAD is now retesting the broken bear channel top. While price holds above the channel, the near-term bias is geared towards further appreciation, though bulls will need to see price break above the 1.3332 level for the reversal to gain traction. To the downside, any break lower will turn attention to the 1.2961 level next.

BOC Says Recovery Beating Expectations

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