Canadian bonds advance ahead of BoC policy decision, change seems unlikely at this point

The Canadian bonds strengthened Wednesday as investors remained cautious ahead of the Bank of Canada’s last monetary policy meeting of 2016, which is scheduled to release later in the day.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 3 basis points to 1.60 percent, the yield on long-term 30-year Treasury also dipped 3 basis points to 2.20 percent and the yield on short-term 2-year bond slid 2 basis points to 0.70 percent by 12:40 GMT.

The Bank of Canada is expected to maintain its benchmark interest rate unchanged at 0.5 percent on Wednesday, December 7. Also, the central bank will keep its powder dry in near-term as further rate cut would put housing policies at odds.

The core objective of BoC monetary policy is price stability which means keeping inflation within a range of 1-3 percent. Headline inflation has fallen close to 1 percent in October last year from 2.5 percent in 2014. Since then it has risen sharply to 2 percentage in January. In February reading came at 1.4 percent. In April it reached 1.7 percent, 1.5 percent in May, 1.3 percent in July, 1.1 percent in August, and 1.5 percent in October.  The data has been showing lots of volatility lately.

Moreover, the Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Crude oil prices declined as investors chased in profit after a long rally ahead of OPEC and non-OPEC meeting on Saturday. The International benchmark Brent futures fell 0.6 percent to $53.59 and West Texas Intermediate (WTI) dipped 0.51 percent to $50.67 by 12:40 GMT.

Lastly, Canadian stocks may struggle to recover its winning track Wednesday morning amid sluggish commodities.

The S&P/TSX Composite Index rose 0.20 percent to 15,125.80 at the close of the trading session on Tuesday. While at 12:00 GMT, the FxWirePro's Hourly Canadian Dollar Strength Index stood neutral at -73.86 (lower than -75 represents bearish trend).