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USDCAD: Trading the Bank of Canada Interest Rate Decision

USDCAD: Trading the Bank of Canada Interest Rate Decision

2012-09-05 06:00:00
David Song, Strategist
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Trading the News: Bank of Canada Interest Rate Decision

What’s Expected:

Time of release: 09/05/2012 13:00 GMT, 9:00 EDT

Primary Pair Impact: USDCAD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%

Why Is This Event Important:

While the Bank of Canada is widely anticipated to hold the benchmark interest rate at 1.00% in September, the fresh batch of central bank commentary is likely to spark increased volatility in the exchange rate as market participants weigh the outlook for monetary policy. Although Mr. Carney has talked up speculation for higher borrowing costs, the BoC may no longer see scope to raise the interest rate as the U.S. – Canada’s largest trading partner – copes with a slowing recovery. As the Federal Reserve keeps the door open to expand its balance sheet further, Governor Carney may not want to move too far ahead of its U.S. counterpart, and the central bank head may sound more cautious this time around as the slowdown in global growth dampens the outlook for the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Quarterly Gross Domestic Product (Annualized) (2Q)

1.6%

1.8%

New Housing Price Index (MoM) (JUN)

0.2%

0.2%

Ivey Purchasing Manager Index s.a. (JUL)

52.0

62.8

The Downside

Release

Expected

Actual

Retail Sales (MoM) (JUN)

0.1%

-0.4%

Consumer Price Index (YoY) (JUL)

1.5%

1.3%

Net Change in Employment (JUL)

6.0K

-30.4K

The pickup in private sector activity paired with the heightening threat for a housing bubble may push the BoC to strike a more hawkish tone for monetary policy, and the central bank may show a greater willingness to raise the interest rate in an effort to stem the record-rise in household indebtedness. However, Governor Carney may talk down speculation for higher borrowing costs amid the slowdown in household consumption along with the recent weakness in the labor market, and the central bank head may endorse a wait-and-see approach throughout the remainder of the year as the recent developments coming out of the real economy dampens the outlook for growth.

Potential Price Targets For The Rate Decision

USDCAD_Trading_the_Bank_of_Canada_Interest_Rate_Decision_body_ScreenShot159.png, USDCAD: Trading the Bank of Canada Interest Rate Decision

As the USDCAD maintains the range-bound price action carried over from the previous month, we should see the pair trade sideways going into the rate decision, but the pair may threaten interim support around the 0.9840 figure should the BoC show a greater willingness to raise the interest rate from 1.00%. However, a more dovish statement should trigger a sharp rebound in the exchange rate as market participants scale back bets for a rate hike, and the USDCAD may reverse course over the medium-term as it appears to be building a short-term base coming into September.

How To Trade This Event Risk

As the BoC keeps the interest rate on hold, we will be keeping a close eye on the policy statement, and the fresh batch of central bank rhetoric may pave the way for a long Canadian dollar trade as currency traders maintain bets for higher borrowing costs. Therefore, if Governor Carney sees a greater case to normalize monetary policy, we will need to see a red, five-minute candle following the announcement to establish a sell entry on two-lots of USDCAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to lock-in our gains.

On the other hand, the slowdown in the global growth paired with the renewed slack in private sector activity may lead the BoC to endorse a wait-and-see approach for the medium-term, and we may see Governor Carney sound more dovish this time around as the fundamental outlook for the region deteriorates. As a result, if the central bank head curbs bets for a rate hike, we will carry out the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

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)

JUL 2012

7/17/2012 13:00 GMT

1.00%

1.00%

+3

-33

June 2012 Bank of Canada Interest Rate Decision

USDCAD_Trading_the_Bank_of_Canada_Interest_Rate_Decision_body_ScreenShot157.png, USDCAD: Trading the Bank of Canada Interest Rate Decision

Indeed, the Bank of Canada held the benchmark interest rate at 1.00% as ‘global headwinds are restraining Canadian economic activity,’ but the central bank continued to see scope for a rate hike in an effort to stem the record-rise in household indebtedness. Although the initial reaction in the USDCAD was short-lived, the Canadian dollar certainly gained ground throughout the North American trade as the pair ended the day at 1.0116.

--- 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.

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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

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