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USD/CAD: Trading the Bank of Canada Interest Rate Decision

USD/CAD: Trading the Bank of Canada Interest Rate Decision

2011-10-24 19:15:00
David Song, Currency Strategist
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Trading the News: Bank of Canada Interest Rate Decision

What’s Expected:

Time of release: 10/25/2011 13:00 GMT, 9:00 EST

Primary Pair Impact:USDCAD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%

Why Is This Event Important:

The Bank of Canada is widely expected to keep the benchmark interest rate at 1.00% in October, but the statement accompanying the rate decision is likely to shake up the currency market as investors weigh the prospects for future policy. Indeed, we may see the BoC endorse a wait-and-see approach for the remainder of the year as the fundamental outlook remains clouded with high uncertainty, and dovish remarks from Governor Mark Carney would instill a bearish outlook for the Canadian dollar as the central bank talks down speculation for higher borrowing costs. At the same time, the BoC may keep the door open to normalize monetary policy further as central bank officials expect economic activity to gather pace over the coming months, and the loonie may continue to recoup the losses from the previous month as interest rate expectations gather pace.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Price Index (YoY) (SEP)

3.1%

3.2%

Net Change in Employment (SEP)

15.0K

60.9K

Ivey Purchasing Manager Index s.a. (SEP)

54.8

55.7

The Downside

Release

Expected

Actual

Leading Indicators (MoM) (SEP)

0.1%

-0.1%

Retail Sales (MoM) (JUL)

-0.3%

-0.6%

Gross Domestic Product (Annualized) (2Q)

0.0%

-0.4%

The stickiness in price growth paired with the improvement in private sector activity may encourage the BoC to toughen its stance against the inflation, and hawkish comments from the central bank should lead the USD/CAD to extend the reversal from 1.0656 as market participants raise bets for higher interest rates. However, the slowdown in private sector activity paired with threats of a protracted recovery may lead Governor Carney to carry the neutral policy stance into the end of the year, and the central bank head may talk down speculation for a rate hike given the ongoing weakness within the real economy. In turn, we may see the USD/CAD retrace the decline from earlier this month, and the exchange rate may push higher over the near-term as the pair maintains the upward trend from earlier this year.

Potential Price Targets For The Rate Decision

USDCAD_Trading_the_Bank_of_Canada_Interest_Rate_Decision_body_ScreenShot061.png, USD/CAD: Trading the Bank of Canada Interest Rate Decision

How To Trade This Event Risk

Although we anticipate the BoC to keep the interest rate unchanged in September, the policy statement is likely to spark volatility in the exchange rate, and hawkish comments from the central bank should pave the way for a long Canadian dollar trade as market participants see the central bank normalizing monetary policy further over the coming months. Therefore, if Governor Carney looks to toughen his stance against inflation, we will need to see a red, five-minute candle following the meeting to generate a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

On the other hand, the BoC may strike a cautious tone for the region as the fundamental outlook remains clouded with high uncertainty, and the central bank may show an increased willingness to keep the benchmark interest rate on hold as it aims to balance the risks for the region. As a result, if the policy statement curbs expectations for higher borrowing costs, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in the opposite direction.

Impact that the Bank of Canada Interest Rate Decision has had on CAD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

SEP 2011

9/07/2011 13:00 GMT

1.00%

1.00%

+2

-45

September 2011 Bank of Canada Interest Rate Decision

As expected, the Bank of Canada kept the benchmark interest rate at 1.00% in September, but went onto say that the ‘need to withdraw monetary policy stimulus has diminished’ as the slowdown in the global economy dampens the outlook for future growth. Although the BoC continued voice concerns over the marked appreciation in the local currency, the central bank expects economic activity to pick up in the second-half of the year, and we may see Governor Mark Carney continue to endorse a wait-and-see approach throughout the remainder of the year as the fundamental outlook for Canada remains clouded with high uncertainty. In turn, the BoC may carry its current policy into the following year, and the central bank may stick to its neutral stance for the first-half of 2012 in order to encourage a sustainable recovery. The initial reaction to the rate decision was short-lived, with the USD/CAD trading back below 0.9900, and the Canadian dollar continued to gain ground throughout the North American trade as the exchange rate settled at 0.9832 at the end of the day.

USDCAD_Trading_the_Bank_of_Canada_Interest_Rate_Decision_body_ScreenShot060.png, USD/CAD: Trading the Bank of Canada Interest Rate Decision

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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