The Bank of Canada did not rock the boat at the July policy meeting. The QE taper to $2bn/week was broadly expected and forward guidance for rates and future QE adjustments was unchanged from June. There isn’t much new news on the BoC front since CAD has been pricing most of these developments since April. That likely reflects the bulk of the USD/CAD rally on the announcement, implying a large bit of front-running. The loonie is probably getting closer to a fade point, but more patience is needed on that front, in the view of economists at TD Securities.

BoC stays the course

“The BoC kept to the path, reducing its weekly GoC purchases from $3bn per week to $2bn per week and making only minor tweaks to its overarching narrative. The forward guidance was functionally unchanged, with the Bank stating that there is significant slack in the economy, and pledging to keep the overnight rate at the lower bound until slack is absorbed in 2022H2. Decisions on QE remain subject to the outlook. We continue to look for the BoC to lift rates in October 2022, and we look for a taper to $1bn/week in GoC purchases at the October 2021 interest rate announcement.”

“The policy statement itself was constructive as the Bank noted increased confidence in the recovery. The Bank still views stronger inflation as transitory and 2022 GDP growth saw a large upgrade. At the same time, the BoC at several points acknowledged a level of uncertainty in their outlook.”

“We think the asymmetries lie on CAD selling off on bad news rather than rallying further on good news through the summer. The external backdrop is also key where we think good US data should start to translate with a firmer USD, leaving CAD sensitive to the broader USD and risk sentiment. Markets will likely try to push a retest of the 200-DMA in the near-term but we wouldn’t expect much follow-through beyond that. As a result, USD/CAD is probably getting closer to a fade point, but more patience is needed on that front.”