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Bank of Canada’s tapering unlikely to affect loonie’s direction

USD: The dollar's week-long decline failed to gain more pace yesterday as risk-off trading triggered by new Covid-19 lockdowns provided some support. Oil-sensitive currencies were the most severely hit after the US House Judiciary Committee advanced a bill that would allow the Justice Department to pursue antitrust enforcement against OPEC members, prompting a drop in crude. Oil may struggle to recover in the second half of the week, where President Biden’s climate summit might see more aggressive emission-reduction targets. No data releases are likely to drive market sentiment today, but focus will remain on 1Q earning releases in the US, which have so far proven quite encouraging and may continue to offer a narrative to counter the current choppy environment for risk assets.

CAD: The Bank of Canada is set to announce the size of the second round of asset purchase tapering at its policy meeting today: we are in line with consensus in expecting weekly purchases will be cut by C$1bn to a minimum of C$3bn. There are also some expectations that the Bank may change its forward guidance to signal a rate hike already in 2022. The recent worsening in the Covid-19 contagion situation in Canada and a less successful vaccination program than in the US suggests that the BoC may refrain from adjusting its forward guidance just yet, and should deliver a tapering announcement in line with market expectations. Other factors may influence the market reaction today: the March CPI numbers before the announcement, the new sets of economic forecasts, or any reference to the speed at which the Bank plans to reduce its bond ownership. However, the release will likely not change the direction of the loonie’s soft momentum - domestic contagion story along with oil's underperformance may keep CAD under some pressure for the rest of the week.

EUR: The euro’s ability to remain above 1.2000 will be tested today, but should largely be determined by the generalized global risk sentiment as – like in the US – there is no market-moving data released in the eurozone today. With the main risk event of the week (tomorrow’s European Central Bank meeting) approaching, some wait-and-see approach may dominate in EUR price action today.

GBP: A failed attempt to decisively break above 1.4000 in GBP/USD yesterday was likely attributable to the USD rebound rather than due to GBP specific factor. We remain of the view that levels above 1.40 in the pair should be a matter of when rather than if, thanks to lingering solid GBP fundamentals and the dollar showing more weakness soon, in our view.

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