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USD/CAD Currency Volatility: Canadian Dollar Eyes BOC Rate Review

USD/CAD Currency Volatility: Canadian Dollar Eyes BOC Rate Review

Rich Dvorak, Analyst

USD/CAD, EUR/CAD, CAD/JPY HIGHLIGHTED BY JULY BANK OF CANADA MEETING

  • Canadian Dollar (CAD) implied volatility measures appear muted headed into Wednesday’s monetary policy update from the Bank of Canada (BOC) at 14:00 GMT
  • The BOC is largely expected to leave rates unchanged the rest of this year
  • Forex traders remain net-long spot USD/CAD according to IG Client Sentiment
  • Reserve your spot for free live webinar coverage of the Bank of Canada Rate Decision

Canadian Dollar price action could be stirred on Wednesday’s trading session as currency traders react to the high-impact July BOC meeting. Although market participants are near-certain that Canada’s central bank will leave rates on hold tomorrow according to overnight index swaps, the BOC’s updated monetary policy statement and follow-up commentary from Governor Stephen Poloz might jolt the loonie.

BANK OF CANADA RATE CHANGE PROBABILITY CHART: DAILY TIME FRAME (JUNE 12, 2019 TO JULY 09, 2019)

Bank of Canada Interest Rate Change Expectations

Over the last 20 trading days, rate traders more than halved their expectations that the Bank of Canada will lower its policy interest rate by at least 25 basis points before year-end. In fact, futures were pricing in a 63.6 percent probability that the BOC would cut rates by its December 4 meeting on June 12, but odds currently stand at 17.1 percent.

CANADA ECONOMIC SURPRISE INDEX (CITI): DAILY TIME FRAME (JANUARY 04, 2016 TO JULY 09, 2019)

Canada Economic Surprise Index by Citi

The sharp shift in rate change expectations has been largely driven by improving fundamentals throughout the Canadian economy and is also reflected by the steep climb in the Citi Economic Surprise Index for Canada. The recent string of better-than-expected data since early May has kept the Canadian Dollar bid – particularly in response to the country’s latest inflation report and business outlook survey.

Although, it is expected that the overarching message from Canada’s central bank will be echoed once again tomorrow and confirm the market’s expectation that rates will be left unchanged. The BOC’s Governing Council most recently stated that future policy decisions “will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.” Yet, forward guidance hinted at by Governor Poloz on Wednesday risks stirring additional volatility in the best performing G10 currency.

USD/CAD PRICE CHART: DAILY TIME FRAME (MAY 15, 2019 TO JULY 09, 2019)

Spot USDCAD Price Chart Ahead of July BOC Meeting

USD/CAD selling pressure has ebbed since the beginning of July as suggested by the currency pair’s Relative Strength Index (RSI) rebounding off oversold territory, but the loonie threatens to strongarm price action lower if an upbeat message is revealed by the BOC tomorrow. Although, downside in spot USD/CAD could be limited by technical support from the 8-day EMA and psychologically-important 1.31 handle. Furthermore, the lower bound of the options-derived trading range of 1.3085, as calculated from USD/CAD overnight implied volatility of 5.60 percent, and the short-term bullish trendline both look to keep spot USD/CAD bid.

Looking to spot USD/CAD upside, technical resistance is posed by the negative sloping 34-day EMA. Upside might also be hindered by the 23.6 percent Fibonacci retracement of the currency pair’s recent leg lower – a major level of confluence which happens to align almost perfectly with the 1-standard deviation implied upper bound of 1.3161 calculated from USD/CAD overnight implied volatility.

Correspondingly, it is worth mentioning that USD/CAD implied volatility could be underpriced by markets considering major event risk surrounding the US Dollar (namely Fed Chair Powell’s testimony to congress and the June FOMC minutes release both slated for tomorrow) threatens to exacerbate – or reverse – spot price swings.

EUR/CAD PRICE CHART: 4-HOUR TIME FRAME (JUNE 20, 2019 TO JULY 09, 2019)

USD/CAD Currency Volatility: Canadian Dollar Eyes BOC Rate Review

The downtrend in spot EUR/CAD could easily continue if Poloz and the BOC reiterate a firm stance on monetary policy, which might inspire bears to target its year-to-date low of 1.4636 – the currency pair’s lowest level since October 2017. Although, downside could be mired by the fact that the vast majority of bearish prospects regarding EUR/CAD appear largely priced in already.

That said, spot EUR/CAD is estimated to trade between 1.4669 and 1.4762 over the next 24-hours with a 68 percent statistical probability judging by EUR/CAD overnight implied volatility of 6.00 percent. Before targeting the upper bound of the options implied band around spot prices, EUR/CAD bulls will first have to overcome technical resistance stemming from the 23.6 percent Fibonacci retracement of the currency pair’s trading range since June 24.

CAD/JPY PRICE CHART: DAILY TIME FRAME (FEBRUARY 18, 2019 TO JULY 09, 2019)

USD/CAD Currency Volatility: Canadian Dollar Eyes BOC Rate Review

Spot CAD/JPY is estimated to fluctuate between 82.606-83.321 for Wednesday’s trading session with a 68 percent statistical probability judging by CAD/JPY overnight implied volatility of 8.23 percent. Upside in CAD/JPY looks to be limited by technical resistance near the 23.6 percent Fib retracement of the currency pair’s year-to-date trading range whereas downside could be limited by the rising 8-day EMA and bullish uptrend support.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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