Viraj Patel, Foreign Exchange Strategist at ING, suggests that the tighter financial conditions will be a concern for BoC’s governor Poloz. Key Quotes “This week’s meeting (13 Apr) may signal that policy has reached an inflection point with the turnaround in data to see the BoC endorse a neutral bias. But we suspect that it won’t take much for the downside risks to re-emerge. The strong reliance on export-led growth means that a weak CAD is crucial to the reflationary story. We wouldn’t be surprised to see the BoC follow the Fed this week and strike concern over the tightening of domestic financial conditions. As for USD/CAD, the near-term risks are still skewed to the upside and we could see a move back to 1.32 should oil prices drift lower. Yet, we think the pair will trade within a tight 1.32-1.38 range over a 3-6M horizon – with both the BoC and Fed arguably content with this stability. Fiscal thrust is likely to have a subdued impact on near-term growth, meaning that (future) monetary policy may be required to pick up the slack. With the uncertainty of the Trudeau government’s first federal budget now lifted, there is a growing pressure on the BoC to clarify its policy stance at this week’s meeting. We do not rule out the possibility of the BoC having to deliver a 25bp cut later this year to shore up confidence and keep local monetary conditions easy. With the policy rate likely to remain on hold, front-loaded CAD weakness is even more crucial for a central bank deeply reliant on export-led growth. Even if the BoC were to remain neutral, we see two reasons for why the near-term risks to USD/CAD are skewed to the upside: (i) growing doubts over the durability of the oil price rally and (ii) a correction higher in US rates (given the excessive sell-off).” For more information, read our latest forex news.