Dovish comments are likely to put pressure on the CAD – Commerzbank

The Bank of Canada (BoC) holds its first meeting of the year today. Economists at Commerzbank analyze Loonie’s outlook ahead of the policy announcement.

Will the BoC continue to wait and see?

The actual interest rate decision is unlikely to be particularly exciting at this stage. Instead, the BoC is likely to leave rates unchanged. This should not really surprise the market, even though a small residual probability of a first rate cut is currently priced in.

If the BoC’s statement and Governor Tiff Macklem’s subsequent meeting with reporters can reassure the market of its continued cautious approach, the CAD should benefit slightly given current market expectations.

However, there is of course a risk that the BoC will not fight market expectations very vigorously. Simply because it knows that it is likely to cut rates in the coming months. Dovish comments are likely to put pressure on the CAD. Although this is not my base case, the probability of this happening is much higher than zero given the advanced state of the interest rate cycle. Anyone who needs to manage CAD risks should keep this in mind.