CAD: BoC On Hold, Monetary Policy Report In Focus - Barclays

The BoC is widely expected to hold the overnight rate target unchanged at 0.5% on Wednesday. A recent string of positive data releases, including a strong employment report last week, has taken pressure off the BoC to ease further. In addition, the publication of the Federal government budget has clarified the size of the fiscal stimulus that will help support the economy in the next several quarters.

In that regard, the release of the Monetary Policy Report will be the focus of the markets, as the BoC updates its GDP and inflation forecasts in it and provides clues about the likely path of monetary policy. We expect upward revisions to GDP forecasts(current: 1.4% for 2016), based on the fiscal stimulus and the Q1 constructive data, but only marginal revisions to the inflation forecast.

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Regarding inflation, the relatively small size of the fiscal package and likely lags associated with its implementation should reduce price pressures from the demand side, while the inflationary effects of past CAD depreciation are fading, keeping the inflation path relatively unchanged.

The more upbeat MPR and historical seasonal outperformance might provide some support for the CAD, although oil prices will likely continue to drive the loonie.