BoC March Meeting: Preview & Trading Strategy - BofA Merrill

BoC stuck in wait-and-see mode

We expect the Bank of Canada to hold the overnight rate at 0.50% at its March meeting, reiterating that the growth outlook is roughly in line with its latest MPR (monetary policy report). The most important growth consideration in the next few years, Federal fiscal stimulus, will only be unveiled at the 22 March budget date. Although we expect the BoC to upgrade its 2016-17 growth forecast in the April MPR on stronger government spending, it will be in wait-and-see mode at its meeting this week.

FX: CAD more sensitive to dovish tone.

The on-hold, steady state outcome we expect will likely elicit little market reaction with only a 1-2bp cut priced in the OIS market. However, the substantial repricing of BoC expectations since end-January (Chart 1) where the market is only pricing a 20% chance of a cut through September 2016 (versus 100% end-January) leaves asymmetric risks for the C$.

With USD/CAD having overshot two-year rate differentials on the downside (Chart 2), the market is likely to respond more significantly to any dovish leanings in the statement than the overall positive tone we anticipate.

Additionally, the over 9% appreciation of the C$ off its mid-January lows could raise concerns about an unwanted tightening of financial conditions, particularly as the BoC has yet to see strong evidence of a rebalancing toward non-energy exports as it has long expected.

Therefore, risk/reward favors short CAD positions into Wednesday’s meeting. While not our central case, a dovish tone will challenge the optimistic OIS path (more than a hawkish one), relative to the residual economic risks. That said, with short CAD positions.

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