• The Bank of Canada is set to leave rates unchanged but acknowledge robust growth prospects. 
  • Rising oil prices are also supportive of the economy and the currency.
  • It is hard for the BOC to fight higher yields while the Fed always US ones to rise.

The Europeans and the Japanese dislike higher yields – and Australia is fighting against them – but will the Bank of Canada be able to do the same and push the loonie lower? Probably not. 

While the BOC would like long-term borrowing costs to remain low – thus supporting the government's fiscal stimulus and investment – it may be unable to do so. Here are three reasons for a potential failure. 

1) Growth is strong

The Ottawa-based institution is set to release updated growth and inflation forecasts in its upcoming March 10 meeting, and these will likely be upgraded. The Canadian economy grew by 9.6% in the fourth quarter, far better than expected and laying the basis for a promising 2021. That expansion came before vaccine deployment. 

It will be hard to justify any effort to lower returns on debts when prospects are elevated. BOC Governor Tiff Macklem, who holds a press conference after this publication, will find it hard to answer questions about desired low yields just after presenting a rosy picture. 

Source: FXStreet

2) Oil is on the rise

While the environmentally-minded Canadian government is trying to pivot away from dependence tar sands oil, the province of Alberta is still reliant on exports and the BOC acknowledges oil's importance to the economy. The recent OPEC+ decision to extend production cuts has pushed petrol prices higher – making relatively costly Canadian oil more attractive to extract. 

Exports of the black gold have been material to the C$, and only by recognizing the impact of elevated output, the BOC would give a green light for additional gains.

3) The BOC and the Fed

Roughly three-quarters of Canadian exports go to the US, and monetary has often followed that of the Federal Reserve. That makes the BOC's monetary policy more tied to comments by Fed Chair Jerome Powell than any other central banker – including in fellow commodity-exporting Australia. 

If the Fed allows for Treasury yields to rise – seeing it as a sign of a rosier growth and inflation outlook – the BOC may find it hard to intervene and push long-term borrowing costs lower. 

Conclusion

While no change is expected from Ottawa at this juncture, the mere reluctance to act forcefully against a steepening Canadian yield curve, may unleash fresh loonie strength. 

It is essential to note that the BOC announces its decision just around a critical ten-year bond-auction in the US, so the full impact may not be immediately seen in USD/CAD. Nevertheless, the C$ has room to rise across the board. 

USD/CAD Price Forecast 2021: The complications of COVID-19 on the loonie and the hope for a recovery

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD climbs to fresh monthly highs above 1.0350

EUR/USD climbs to fresh monthly highs above 1.0350

Following a short-lasting downward correction, EUR/USD has regathered its bullish momentum and touched its highest level in a month above 1.0350. After the soft July inflation data, the dollar remains under constant selling pressure, fueling the pair's rally.

EUR/USD News

GBP/USD advances beyond 1.2250 as dollar selloff continues

GBP/USD advances beyond 1.2250 as dollar selloff continues

GBP/USD has advanced to a fresh weekly top above 1.2250 on Wednesday. Pressured by the weaker-than-expected July figures, the US Dollar Index is down more than 1% on the day below 105.00, providing a boost to the pair.

GBP/USD News

Gold tries to claim $1,800 amid falling US yields

Gold tries to claim $1,800 amid falling US yields

After having failed to reclaim $1,800 with the initial reaction to US inflation data, gold is, once again, attempting to break above that key level. The benchmark 10-year US Treasury bond yield is down nearly 2% on the day, helping XAU/USD push higher.

Gold News

Crypto markets tumble, but the worst is yet to come

Crypto markets tumble, but the worst is yet to come

Bitcoin price is trying to undo the gains it witnessed over the last week and is currently at the midway point. This sell-off has caused Ethereum and Ripple prices to follow suit, pausing the rallies that altcoins were experiencing.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures