All Eyes on the BOC’s Rate Decision and Succeeding Comments
The Bank of Canada is expected to raise their key overnight interest rate to 0.50 percent from 0.25 percent on June 1st as Governor Mark Carney recently dropped a “conditional commitment” to leave rates unchanged until July amid inflation and faster-than-expected growth. Indeed, market participants are weighing in a sixty eight percent chance that the central bank will hike rates twenty five basis points tomorrow, according to the Credit Suisse Overnight Interest Rate swaps. It is also worth mentioning that Canada’s largest trading partner; the U.S. is also witnessing an improved fundamental outlook as employment in the U.S. jumped 290K in April, while economists are expecting the labor force to sky rocket 500K in May. This bodes well for trade and may mitigate the effects of a slowdown in Europe.
Taking an in depth look at the fundamental developments from the loonie, economic activity in the first quarter expanded at the fastest pace in nearly a decade on the back of consumer spending and manufacturing. Additionally, private companies added the most jobs in the region in April since 1976, while the unemployment rate fell to 8.1 percent from 8.2 percent in the same period. Furthemore, consumer spending jumped 1.1 percent in the first quarter from the three months through December on the back of semi-durable goods such as footwear and clothing. Nevertheless, the country has benefited from the rise in commodity prices largely due to the fact the Canada is the world’s second – largest exporter of natural gas.
However, it is worth noting that with a rate hike, policy makers may accompany the decision with a dovish statement as growing uncertainties surrounding the European debt crisis continues to linger. If the BOC does indeed decide to raise borrowing costs, it will make the region the first among the Group of Seven to raise rates since last year’s global recession. All in all, Canada’s domestic economy remains in a position of strength.
USDCAD: The pair has recently broken above the 200-day SMA which has formed as a line of resistance since May 2009. However, the pair now looks tests this simple moving average for support after paring yesterday’s advance amid better than expected economic activity from Canada. Furthermore, dramatic USD advances led to similarly pronounced moves in FX options market sentiment, leading us to believe that the pair could continue higher through recent trade. Looking ahead to tomorrows rate decision, investors should keep a close eye on the comments following the decision as the technical developments illustrate that this may be an ideal time to go long.
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Written by Michael Wright, Daily FX Research
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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Weekly Spotlight, and Forex Trading Weekly
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.