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USD/CAD- Trading the Bank of Canada (BoC) Rate Decision

USD/CAD- Trading the Bank of Canada (BoC) Rate Decision

David Song, Strategist

Trading the News: Bank of Canada Interest Rate Decision

What’s Expected:

Time of release: 07/17/2013 14:00 GMT, 10:00 EDT

Primary Pair Impact: USDCAD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%

Why Is This Event Important:

Although the Bank of Canada (BoC) is widely expected to keep the benchmark interest rate at 1.00% in July, the fresh batch of central bank rhetoric accompanying the rate decision may drag on the Canadian dollar should Governor Stephen Poloz strike a more dovish tone for monetary policy. Indeed, the new central bank head may look to further support the real economy amid the slowing recovery, and we may see the BoC retain its wait-and-see approach for an extended period of time in an effort to encourage an improved outlook for growth and inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Housing Starts (JUN)

187.5K

199.6K

Building Permits (MoM) (MAY)

-5.2%

4.5%

Quarterly Gross Domestic Product (Annualized) (1Q)

2.3%

2.5%

The Downside

Release

Expected

Actual

Business Outlook Future Sales (2Q)

30.00

9.00

Ivey Purchasing Manager Index s.a. (JUN)

58.3

55.3

Retail Sales (APR)

0.2%

0.1%

The BoC may show a greater willingness to deliver a rate hike later this year amid the persistent strength in the housing market, and a more hawkish policy statement may spark a bullish reaction in the Canadian dollar as market participants weigh the outlook for monetary policy. However, Governor Poloz may sound a bit more cautious on the economy amid the slowdown in private sector consumption, and we may see the BoC preserve a neutral policy stance throughout 2013 in an effort to encourage a stronger recovery.

Potential Price Targets For The Rate Decision

Forex_USDCAD-_Trading_the_Bank_of_Canada_BoC_Rate_Decision_body_ScreenShot159.png, USD/CAD- Trading the Bank of Canada (BoC) Rate Decision

As the USDCAD breaks out of the consolidation phase dating back to 2011, the upward trending channel from earlier this year should continue to take shape, and we may see the pair carve out a higher low in July should the BoC talk down bets for a rate hike. However, Governor Poloz may keep the door open to introduce a rate hike in order to curb rising home prices, and we may see a more meaningful correction in the exchange rate should the central bank show a greater willingness to normalize monetary policy further.

How To Trade This Event Risk

As the BoC retains its current policy stance, we will be closely watching the statement accompanying the rate decision, and the fresh batch of central bank rhetoric may set the stage for a long Canadian dollar trade amid speculation for higher borrowing costs. Therefore, if Governor Poloz shows a greater willingness to raise the benchmark interest rate from 1.00%, we will need a red, five-minute candle following the announcement to establish a sell entry on two-lots of USDCAD. 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 generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade hits its mark in an effort to lock-in our gains.

On the other hand, the slowdown in household spending paired with the persistent slack in private sector activity may lead the BoC to carry a wait-and-see approach into the end of the year, and we may see the new central bank head strike a more dovish as the fundamental outlook for the region deteriorates. As a result, if Mr. Poloz see limited scope 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)

MAY 2013

05/29/2013 14:00 GMT

1.00%

1.00%

+19

-26

May 2013 Bank of Canada Interest Rate Decision

Forex_USDCAD-_Trading_the_Bank_of_Canada_BoC_Rate_Decision_body_ScreenShot158.png, USD/CAD- Trading the Bank of Canada (BoC) Rate Decision

Indeed, the Bank of Canada held the benchmark interest rate at 1.00% as Governor Mark Carney departs from the central bank, but kept the door open for higher borrowing costs as the outlook for growth and inflation improves. Despite the limited reaction immediately following the rate announced, the Canadian dollar firmed up during the North American trade, with the USDCAD ending the day at 1.0347.

--- 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, please follow this link.

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