The market expect the Bank of Canada to keep its policy rate unchanged at 0.75% on Wednesday. With the last meeting having coincided with the release of its new MPR, the statement is not expected to contain any substantive changes.
The BoC has signaled that it is comfortable with the current level of interest rates and its January rate cut has bought it some "insurance" against disinflationary risks. Economic activity has stabilized recently and the bounce back in oil prices has also been a positive.
However, the recent appreciation of the CAD (REER has appreciated by more than 4% since early April) offsets some of these improvements.
Barclays notes:
- We believe the effect of lower oil prices on investment and consequently growth will be long lasting, whereas higher unit labor costs in the manufacturing sector are likely to impede the economy's ability to take advantage of a weaker currency.
- We remain bullish on USDCAD over the coming months and remain short CADMXN.
