Stephen Poloz should reiterate earlier concerns on recent Canadian Dollar gains but the overall tone of his speech Wednesday should be broadly hawkish.

Traders should sell the Euro short against the Canadian Dollar ahead of a key speech from Bank of Canada governor Stephen Poloz, according to TD Securities strategists who argue fears over the BoC trying to “jawbone the currency lower” are likely overdone.

They can also consider buying the Loonie against both the Australian and New Zealand Dollars.

Poloz will deliver a speech titled “The Meaning of Data Dependence: An Economic Progress Report” at 16:45 London time, which could see the BoC governor reiterating earlier comments from deputy Timothy Lane that the central bank is watching the Canadian currency closely in the wake of September’s rate hike.

“Given that the economy continues to evolve in a constructive fashion suggests that the overall tone of this speech should be hawkish even if he mentions the Bank is assessing the impact of the currency,” say strategists Mazen Issa and Brittany Baumann at TD Securities.

It is suggested traders sell the Euro short against the Canadian Dollar at around 1.4560, placing a stop loss at 1.4770 and targeting a move downward to the 1.4200 level.

The Euro-to-Canadian Dollar rate was trading at around 1.4500 Wednesday afternoon, a short time ahead of Poloz’s appearance.

“Indeed, a reference that the Bank still sees “considerable stimulus” in the speech would be hawkish. Note that the Bank reintroduced this reference earlier this month after it hiked twice,” adds Issa.

Issa wrote in a note accompanying the recommendation that the Bank of Canada possibly wants the market to think that every policy meeting is “live” going forward, meaning another hike is possible.

“Realized growth, wages and trend inflation all raise conviction that the output gap is indeed closing. And to a data dependent central bank, incoming data remains supportive of a path of normalization and, importantly, indicates no red flags to the outlook either,” says Issa.

The theory and recent data make it more likely that either Poloz on Wednesday, or other policymakers in the near future, lean back toward a hawkish tone.

“The Bank speaks with “one voice” so Lane’s comments last week reflect Poloz’s view already,” says Issa. “It would very much be out of character for the Bank to explicitly jawbone the currency especially to the same extent to its dollar bloc peers.”

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.The Canadian Dollar has gained sharply on almost all of its G10 counterparts throughout the course of the month.

However, it took a knock last week and strategists questioned the resolve of the BoC after deputy Timothy Lane told a Saskatoon audience policymakers are watching the impact of higher rates on both the economy and the currency.

“Typically, the Bank acknowledges currency dynamics. In fact, it would be rather odd that the BoC did not acknowledge such a development given the move in the currency,” comments Issa.

This Works For Other Crosses Too

TD strategists have forecast a strong Canadian Dollar going into and coming away from Wednesday's speech by Poloz, particularly against currencies whose short term backdrop is challenging, so traders can play this against the Euro as well as other currencies like the Australian and New Zealand Dollars.

"The first two have clear positioning risks which we think is in the process of being unwound and has further to run while kiwi is likely to struggle owing to an uncertain political backdrop which may not be sorted until early October."

Traders might want to avoid any bets against the USD/CAD pair however, as with the Federal Reserve having reinvigorated USD bulls and a tax reform deal set to be announced on Wednesday, such as trade could be costly if it goes wrong.

But Not Everybody Agrees About The Bank of Canada

Increased focus on the Bank of Canada comes after it caught markets by surprise earlier in September by responding to a run of stronger than expected economic data with a second hike of the benchmark policy rate inside of three months.

But not everybody is as bullish as the strategists at TD Securities as some economists see the BoC pausing its hiking cycle for a short while.

“Deputy Governor Tim Lane’s latest speech gave a taste of what we’re likely to hear from Governor Poloz on September 27th, as well as in October’s policy report,” says Avery Shenfeld, chief economist at CIBC Capital Markets. “But it had to serve two masters: justifying the recent rate hike, while laying the groundwork for an upcoming pause.”

This is while at least one economist thinks the Canadian central bank may actually reverse its recent increases in rates.

“After a strong growth performance so far this year, Canada's economy looks on the verge of a downturn as the housing boom turns to bust,” writes Paul Ashworth, chief North American economist at Capital Economics. “We expect GDP growth to slow sharply next year, prompting the Bank of Canada to reverse its tightening cycle.”