Bank of Canada decision due at 10 am ET
The Bank of Canada is currently buying $3 billion in bonds per week but all 21 economists forecast ahead of tomorrow rate decision expect that to be trimmed. The question is: how much?
The vast majority are betting on a $1 billion taper to $2B/week. In June, Macklem said adjustments to the QE program would be gradual and a larger taper wouldn't exactly fit that description.
Still, there is talk about a $1.5B taper or even a $2B taper, in part due to strong recent Canadian growth and jobs data. The economy held up much better than anticipated in April-June lockdowns and that has surely made Macklem and the BOC more confident that a recovery is coming.
Macklem also flagged the strong Canadian dollar as a potential problem in mid-June but since then, it has weakened considerably. That will give the BOC more breathing room to consider a faster taper.
On the flip side, the housing market appears to be slowing on its own and that dials back the urgency to tighten policy.
If the taper is $1B, as expected, the focus will shift to BOC commentary. The current comments on the output gap suggested a hike in H2 2022.
Macklem could be troubled by the latest inflation numbers, which showed May CPI at 3.6%,m well above their forecast of 2.9%. It would be monumental of Macklem broke away from the central bank ethos around temporary price hikes but he could highlight the combination of more uncertainty on inflation and more confidence on growth to take a more-hawkish stance.
Overall, I see upside risks to the Canadian dollar on Wednesday but that assumes the loonie can disconnect from the recent market mode where the US dollar is driving broader price action.
