BOC Preview: Will Tiff Mackelm be tough? Three ways the new governor can move USD/CAD

• The Bank of Canada is set to leave rates unchanged in June, and investors will examine the bank's tone.
• Any comment by Tiff Macklem's on negative rates may rock the loonie.
• The new Governor's approach to QE is also high on the agenda.

Has the previous crisis prepared Tiff Macklem for the job? The new Governor of the Bank of Canada is assuming the position in the middle of the coronavirus crisis after deputizing for Mark Carney around the financial crisis.

Outgoing chief Stephen Poloz already took the needed emergency measures at the peak of the financial turbulence in March – and set interest rates at a minimum of 0.25%, something that is unlikely to change. Nevertheless, Macklem may still have a considerable impact on the loonie – from the get-go. 

Here are three things to watch out for in the new boss' first decision:

1) Rosy glasses still on?

Poloz seemed almost always cheerful, seeing the glass half full, and he continued with this line until the very end – saying that the economic situation will not be as dire as many think. Does Macklem share this view? An ongoing upbeat outlook may boost the loonie, while pessimism would send it down. 

At the time of writing, COVID-19 claimed over 7,000 lives and infected more than 90,000 in Canada. Looking at mortalities per million, The nation fared better than Germany, Italy, Spain, the UK, and the US at the outset, but Canada's curve refused to decline in recent weeks, and it is now on the rise. Per million, the situation is only better than the UK in this comparison.

Source: Financial Times

Macklem may express concern about the current health state. 

The Canadian economy shrank by 8.2% annualized in the first quarter, better than expectations and the eurozone but worse than America, its largest trading partner.

While the two North-American economies are closely linked, Canada is more dependent on oil prices, which suffered severely already early in the year. However, crude has been recovering, and that Q1 figure may be skewed to the downside. The new Governor has room for optimism on this front. 

Worse contraction than in the financial crisis

The labor market is reeling, with Canada's unemployment rate soaring to 13% after losing nearly two million jobs in April. That may fall as government plans kick in to keep people at work and support those who have lost their jobs. How does Macklem see the balance between the sudden crash and the hopes for a recovery? That is unknown.

2) Negative rates

All over the world, currencies have been moving amid speculation for sub-zero borrowing costs. The US dollar fell when the Federal Reserve categorically denied it, while the pound dropped after officials at the Bank of England seemed to warm up to the idea. 

At his presentation as the new Governor, Macklem said it is one of the tools available to the Ottawa-based institution, weighing on the C$. When the dust settled, it emerged that he mentioned it as a possibility, but not one that he prefers. 

Will the BOC's statement include a mention of setting negative rates? The most likely scenario is that it is omitted. Macklem does not face the press at this juncture, so it would be easier to avoid the topic altogether. However, if sub-zero rates make their way into the official release, the Canadian dollar could tumble.

Rates never went below zero in Canada. 

3) More QE

Contrary to their neighbors down south, the BOC is somewhat shy of bond-buying. The Quantitative Easing (QE) scheme it introduced in March consisted of C$!10 billion of corporate bonds and C$50 billion of provincial ones. 

If Macklem remains open to more bond-buying, it would be positive for the Canadian dollar. While money printing is seen as a devaluation, it could support government relief and stimulus, boosting the economy.

If he hints at a significant and imminent boost to such schemes, that could already tip the balance against the loonie. It would also show that the BOC, under new management, is alarmed. 

Conclusion

Traders will carefully watch every word in Tiff Macklem's first decision as BOC governor. Comments on the current economic situation, negative rates, and QE are all critical for the Canadian dollar.