The Bank of Canada will hold its first monetary policy meeting on Wednesday, just hours before its US counterpart. There is a fairly solid consensus that, after cutting rates throughout last year, the BOC will once again hold policy unchanged. However, the uncertain geopolitical situation leaves some doubt about the future and how the CAD could react to the central bank’s commentary.

Canada-US trade tensions have been in the news recently after Prime Minister Mark Carney (and former BOC Governor) announced a trade deal with China. US President Donald Trump threatened sanctions against Canada if it signed a free trade agreement with China, using the recent de-escalation of the tariff dispute as a stepping stone. But Carney assured that Canada had no intention of moving towards a full trade deal with China, and markets quickly forgot about the incident.
 

Markets Are Ignoring Tariff Threats

Threats of potential tariffs are having an increasingly smaller effect on markets, as evidenced by Trump’s Monday social media post threatening South Korea with new levies. The Asian nation has so far not passed legislation confirming the trade deal it signed with the US last year. The market barely moved after the announcement.

This can be particularly relevant for the BOC outlook, since US tariffs on Canada and it’s ratialtory levies have been used by Tiff Macklem to justify some of the bank’s monetary policy actions. Though in Canada’s case, the situation is somewhat different, because the tariffs are actually in effect. However, inflation resulting from the tariffs hasn’t been as large as initially feared, and it could become increasingly sidelined as a central bank issue.
 

Sticking to the Right Level

Markets are pricing in around a 90% chance of rates staying unchanged, with the dissenters expecting a rate cut. This means that if the BOC delivers on expectations, the CAD could strengthen slightly, but largely stay in line with the current trend. While a rate cut would be a major surprise and could substantially weaken Canada’s currency.

What could generate a stronger market reaction, assuming no policy change, is a shift in the BOC’s rhetoric. At the last meeting, Macklem said that rates were “about the right level”, which was interpreted by many analysts as signalling an end to the recent easing cycle. The BOC cut rates twice last quarter but did not cut in December. This could put the BOC ahead of the Fed in the easing cycle, which could support the CAD as the BOC generally stays the course while the Fed eases later in the year.
 

What to Look Out For

Markets are likely to be looking for a reiteration of Macklem’s prior views that monetary policy is at the right level. If he deviates from this rhetoric, it could move markets. Expressing concern about recent inflation trends could give the impression that the BOC is taking a more hawkish stance, potentially leading to a rate hike as its next move. This could support the CAS, at least in the short term.

On the other hand, if Macklem returns to expressing concerns about the economy and the effects of tariffs, the market might take it as a dovish shift by the BOC. This could further weaken the CAD as markets move to price in an earlier rate cut than previously.

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