BOC Takes Action

The April Bank of Canada meeting held yesterday firmly caught the market off-guard. Traders had been bracing themselves for the bank to announce the tapering off of its monthly asset purchases along with some upward revisions to its economic forecasts. The expectation here was that should the bank satisfy the consensus, CAD was likely to be neutral – mildly. However, CAD was seen firmly bid higher in response to the meeting as the bank confounded these expectations with a different course of action.

Rate Hike Projections Brought Forward

The BOC announced that it will reduce the scale of weekly bond purchases to C$3 billion from C$4 billion, as was expected. The BOC noted that this adjustment “reflects the progress being made in the economic recovery.” The bank also announced that it will hold rates at the current level of 0.25% (record lows) until such time as the bank’s inflation target is achieved. However, the bank’s target timeframe for lifting rates was unexpectedly brought forward from 2023 to the second half of 2022. This was clearly a hawkish shift and had not been anticipated ahead of the meeting.

GDP Projections Revised Higher

There was a further bullish twist seen in the bank’s new set of economic forecasts. The BOC revised its GDP forecast higher to 6.75% for 2021, 4% in 2022 and 3.5% in 2023. In explaining the upward revisions, the BOC said that “The global recovery has lifted commodity prices, including oil, contributing to the strength of the Canadian dollar”.

Outlook Has Improved

In assessing the domestic economy, the BOC said that “Activity has proven more resilient than expected in the face of the COVID-19 pandemic, and the rollout of vaccines is progressing.” With this in mind, the bank noted that “the outlook has improved for both the global and Canadian economies” and said that “growth in the first quarter appears considerably stronger than the Bank’s January forecast, as households and companies adapted to the second wave and associated restrictions.

Word of Caution

However, as we have heard from other central banks, the BOC was keen to highlight that downside risks do remain, explaining that: “more contagious variants of the virus are straining healthcare systems and affecting hard-to-distance activities, and have introduced a new dimension of uncertainty.”

CAD Set For Further Gains

All in all, it was a firmly hawkish meeting from the BOC and CAD has been well bid in response to the bank’s statement as traders bring forward their rate hike expectations. As the BOC noted, there is still uncertainty within the outlook. However, if vaccinations can continue to pick up momentum and a third wave can be avoided, the BOC should stay on course to lift rates next year.

Technical Views

The rally in CAD saw GBPCAD reversing sharply from the 1.7578 level with price breaking back below the 1.7433 mark. While below here, the market is on course to test the 1.7198 level support next. This is a major support floor for the pair and a break here would be firmly bearish.

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