Canadian Dollar Overlooks Risk of BoC Rate Cut: Is it Really Such a Wild Card? 

- CAD on front foot while near 2020 highs Vs USD ahead of BoC.
- Market prices steady rates & yawner of a policy announcement.
- Wild card risk it follows RBNZ & RBA precedent in December.
- Toronto closures may risk policy response despite vaccine win.

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The Canadian Dollar remained among the better performing major currencies for the recent week on Tuesday as it continued to overlook the risk of a surprise policy move from the Bank of Canada (BoC) on Wednesday, which might not be as much a wild card scenario as market pricing suggests it is. 

Like other currencies Canada's Dollar has paid little mind to domestic developments of late, although it would struggle on Wednesday to ignore an interest rate cut or other policy move from the BoC if one were announced given investors currently view it as such a negligible risk. 

Tuesday's pricing in the overnight-index-swap market implied a BoC cash rate of 0.21% on Thursday, indicating less that investors see only around a 20% probability of it being cut from the current 0.25% level, although there's a number of reasons why such a firm assumption could be complacent. 

Much has changed since the BoC last reviewed its policy settings and for the better too, with Britain becoming first on Tuesday to administer a coronavirus vaccine in a non-research setting; effectively the starting step in a global rollout that could make redundant the destructive measures favoured so far by governments as a means of coronavirus containment. 

"The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved," the BoC said in October. "The Bank is continuing its QE program and recalibrating it as described above. The program will continue until the recovery is well underway. We are committed to providing the monetary policy stimulus needed to support the recovery..." 

A vaccine puts light at the end of the tunnel for economies the world over although for the Canadian Dollar there's a chance it could become a bit of a double-edged sword on Wednesday. 

Above: USD/CAD rate shown at daily intervals with 200-day moving-average.

This is if it leads the BoC to feel confident firing one of its last policy bullets in a bid to support Canada's economy as the country's largest city, Toronto, grapples with a month-long 'lockdown' that was imposed in late November. 

A range of businesses have been forced to close again as result, although new measures have also been deployed in other parts of the country too. 

Canada's central bank and policymakers have said repeatedly that 0.25% is the "zero lower bound" for the cash rate from which it will not be cut, although this was also true of the Reserve Bank of Australia (RBA) too,...until it went ahead in early November and reduced its own cash rate from 0.25% to 0.10%.

The RBA cut rates and bolstered its quantitative easing programme following renewed as well as extended shutdowns in major Australian cities and states. 

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The BoC's position on the cash rate could change while the bank has not ruled out further increases to its quantitative easing programme like that announced by the Reserve Bank of New Zealand (RBNZ) in August, after the Kiwi economy's largest metropolis was placed back into a strict lockdown. 

Neither the market nor Canadian Dollar are anticipating any changes from the BoC on the quantitative easing front this Wednesday at 15:00 when the bank announces its final policy decision of 2020. 

Investors clearly feel that an early stage vaccine rollout is reason to expect the BoC to sit on its hands this week, although doing so would require the bank to overlook the impact that new restrictions are widely expected to have on the labour market and broader economic recovery in the final quarter.

Above: Pound-to-Canadian Dollar rate shown at daily intervals with 200-day moving-average.

It's not obvious the BoC would sit on its hands throughout a period of economic trauma if it has the option of doing something to ease the burden on Canadians, or at least be seen to be attempting to ease that burden. 

If the bank "committed to providing the monetary policy stimulus needed to support the recovery," while  a vaccine rollout is offering a glimpse of a firm economic rebound next year, the BoC may no longer need to prioritise so highly the preservation of its remaining policy ammunition.

Put differently, the BoC could feel more at ease with an increase to its already C$4 billion a week QE programme, or a downward revision to its "zero lower bound" in order to facilitate an RBA style interest rate cut to 0.10% on Wednesday given its newfound knowledge of a recovery outlook for 2021 that's increasingly assured by a vaccine.  

The RBA and RBNZ have almost set a precedent for responding to renewed 'lockdown,', while central banks which are collegiately collaborative at the best of times, have become even more herd-like this year amid the pandemic with an almost unprecedented amount of coordination acknowledged. 

But with investors, markets and the Canadian Dollar giving such short-shrift to the prospect of a policy change on Wednesday, the Loonie would be unlikely to take well any actual decision to either cut the cash rate, or one to simply put more pressure on Canadian government bond yields through an again expanded quantitative easing programme. 

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