Canadian Dollar Volatility Ahead on Rate Decision, Risk Trends

The Canadian Dollar could see heavy volatility in the week ahead as a flux in risk sentiment is compounded by an interest rate decision from the Bank of Canada. An actual change in benchmark borrowing costs is effectively off the table – the BOC has explicitly expressed the intent to keep rates at 0.25% at least through the first half of next year. The markets are in agreement, with overnight index swaps showing that traders are pricing in virtually no change in rates this time around. Whether or not the news proves market-moving will depend on the bank’s rhetoric vis-à-vis the Canadian Dollar in the statement accompanying the monetary policy announcement. BOC Governor Mark Carney has said that the currency’s appreciation over recent months has been a major obstacle for economic growth, adding that he has the “flexibility” to deal with it. Finance Minister Jim Flaherty echoed Carney’s comments, saying “steps could be taken” to check the currency’s ascent. It should not be too difficult for policymakers to make good on such threats because they can simply print more money and let it loose into circulation, so the markets have little reason not to take any language suggesting intervention at face value. To that effect, traders will likely sell the Canadian Dollar should the likelihood of such an outcome be perceived as increasingly likely.