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Stephen Poloz faces a familiar conundrum on Wednesday, although the stakes may be the highest since he took over the helm from Mark Carney. Expectations are heating up that the Bank of Canada may signal an easing bias – or formally state an inclination to cut rates – in its policy statement this week.

Faced with alarmingly low inflation, recently dismal jobs data, and a free-falling Canadian dollar, Mr. Poloz is backed into a corner. If he cuts rates, he flirts with the danger of stoking the housing market further. If he raises rates, he's throwing a wet towel on currency depreciation – one that our manufacturing sector would welcome with open arms – and threatening to further depress price levels.

No economist is willing to forecast an outright rate cut at this meeting. Rather, focus is squarely on how the Bank of Canada addresses the future of interest rates in its post-meeting statement. At 10am on Wednesday morning, traders will be examining the final paragraph about rates with an intensity resembling a laser beam. Any tweaks to the words "policy stimulus currently in place remains appropriate" could instantly swing the loonie a half-cent in either direction.

Bloomberg conducted a poll specifically about this language, and zero economists expect the bank to formally insert an easing bias in its statement this week.

Still, speculation is rife enough that a "neutral" statement – leaving the current phrase unchanged – could spur a brief relief rally in the dollar. According to Nomura strategist Charles St-Arnaud, with many investors expecting a more dovish stance from the central bank, the risk is that "a neutral stance could lead to a sell-off in USD/CAD." Gennadiy Goldberg, TD strategist, says if there is no explicit easing bias in the language, "there is room for a modest CAD retracement."

Any rally should be short-lived. Even if the Bank of Canada leaves its statement untampered with, expectations are now so deeply rooted for dovish future policy that Canadian bonds should be strongly underpinned in the months ahead.

"There's this increasing view that the next move from the Bank of Canada is to cut interest rates," David Rosenberg told Bloomberg. "That spells an outperforming Canadian bond market," he said, adding, "It would be foolhardy to suggest the bank couldn't shift its bias at the coming meeting based on the latest data."

Of course, if the Bank goes so far as to explicitly state an easing bias this week, the Canadian dollar will plunge further and bond yields will similarly decline.

Toying with market expectations is common practice in central banking, and the Bank of Canada will no doubt be using forward guidance as it continues to grapple with competing forces that will likely prevent Mr. Poloz from actually acting on rates.

Even so, markets could pre-empt the central bank. Traders will likely continue buying Canadian bonds in anticipation of a rate cut – which would push bond yields lower, essentially cutting rates before the Bank of Canada does. Markets are now pricing in about a 30 per cent chance of a cut in the next six months. Moreover, RBC cut mortgage rates by 10 basis points, just two days before the Bank of Canada meeting, which appears to be a reflection of falling government bond yields.

If data continues to underperform and the Bank of Canada doesn't deny the possibility of a rate cut, the market could unofficially do the central bank's dirty work. However, Canadian rates are ultimately tied to those south of the border, where treasury yields should climb inexorably higher as the Federal Reserve continues tapering its stimulus program.

At this point, Mr. Poloz would do well to remain in neutral gear. The dollar has already made considerable leaps lower, which should eventually translate into some inflationary pressure as well as buoy exports. And as the other banks follow RBC's lead, the last thing the central bank will want to do is further encourage more household debt by cutting rates. The Bank of Canada should remain as tight-lipped as possible in the next few months – until the balance between a stagnating economy and an overheated housing market tips in a discernible direction.