The Bank of Canada rate decision is at 10 am ET (1400 GMT) on Sept 8
Hopes for a rapid reopening and rebound in the Canadian economy took a decidedly negative turn last week after the second-quarter GDP report showed a surprise 1.1% contraction, much worse than the 2.5% annualized growth pace economists expected. Compounding that was a July preliminary estimate from Statistics Canada of a further 0.4% decline as cooling housing activity and exports overshadowed reopening demand.
The date means that hopes for +6% GDP growth this year are dead.
With delta fears also mounting, it could also mean the Bank of Canada stays on the sidelines for longer.
In July, the BOC tapered its weekly QE pace to $2 billion from $3 billion in a continuation of an every-second-meeting slide in purchases. This is the first meeting since then and expectations were always low of a further taper, with nearly everyone expecting the pace to continue. With the latest round of data, there is no doubt that Macklem will leave policy unchanged and a taper at the Oct 27 meeting is no longer a sure thing.
A recent poll of economists by Reuters has 16 of 19 forecasting a taper to $1B/week but three said the BOC will wait longer.
Adding to the uncertainty is that Canadians will vote in a Federal election on Sept 20 and central bankers won't want to rock that boat. That means disappointing economic data could be downplayed, with the BOC likely putting off hints about its latest forecasts until the MPR at the Oct meeting.
Those indications about the strength of the Canadian economy are likely to be the market mover. The Canadian dollar has recovered from the delta-inspired swoon in August and is back to the middle of its summer range. If the BOC sounds like it's downplaying issues related to delta and bottlenecks, the loonie could climb. We saw a similar dynamic last month when the Reserve Bank of New Zealand brushed aside virus impacts and the kiwi has steadily climbed since.
After the Bank of Canada decision, the market will gravitate back towards oil and gas prices as the main driver for the loonie, along with the broader risk move. However as we tick down to the election, it could be more of a factor. While a minority government remains likely -- meaning high spending a little change no matter if it's Trudeau or O'Toole -- I expect capital markets and the loonie will start to build in a loonie boost on better sentiment around O'Toole.
Expect USD/CAD to fall back to 1.2400 by month end.
