BoC expected to taper but stay dovish

The Canadian dollar is almost unchanged ahead of the North American session. Currently, USD/CAD is trading at 1.2604, down 0.04% on the day.

BoC policy meeting looms

The spotlight will be on the Bank of Canada, which holds its policy meeting later today (14:00 GMT). The bank is expected to maintain interest rates at a record low of 0.25%, where they have been pegged since last March. The markets have priced in a taper to the bank’s asset purchase programme, with expectations that the BoC will trim weekly purchases from CAD 4 billion to 3 billion.

How would a taper affect the Canadian dollar? With the markets expecting such a move, any market reaction would likely be driven by how optimistic the bank’s updated forecasts are regarding the economy, as well as any hints about the direction of future monetary policy.

The tone of the rate statement and follow up press conference could affect the direction of USD/CAD. Economic data has been positive, with 90% of jobs lost during Covid have been recovered and GDP is expected to climb above pre-pandemic levels in the second quarter, as the pace of the recovery has been faster than anticipated.

At the same time, Covid rates are soaring as a third wave has hit the country hard. Toronto, the largest city in the country, is under a strict lockdown for at least another month, and the country’s vaccine rollout has been anaemic. With widespread health restrictions in place, economic growth will be hampered, slowing the recovery. Will the BoC choose to focus on the improving economy or the worsening Covid situation? The answer to this question could well affect the direction of the Canadian dollar in the North American session.

It’s also worth noting that a BoC taper would be a very significant move, as it would mark the first tightening in policy by any major central bank since the Covid pandemic started last year.

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USD/CAD Technical

With the Canadian dollar unchanged, the weekly support and resistance lines remain unchanged:

• On the upside, CAD is testing resistance at 1.2598. Above, there is resistance at 1.2690
• There is support at 1.2446. This is followed by support at 1.2386

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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