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USD/CAD Risks Fresh 2015 Highs on BoC Rate Cut- 1.2940 on Tap?

USD/CAD Risks Fresh 2015 Highs on BoC Rate Cut- 1.2940 on Tap?

2015-07-15 08:00:00
David Song, Shuyang Ren,
Share:

- Bank of Canada (BoC) Expected to Cut Benchmark Interest Rate to Record-Low of 0.50%.

- Will Governor Stephen Poloz Leave the Door Open for Lower Borrowing-Costs?

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Trading the News: Bank of Canada Interest Rate Decision

According to a Bloomberg News survey, 15 of the 29 economists polled forecast the Bank of Canada (BoC) to reduce the benchmark interest rate by 25bp to a record-low of 0.50%, and a dovish statement accompanying the rate decision may spur fresh 2015 highs in USD/CAD especially as the Fed remains on course to normalize monetary policy later this year.

What’s Expected:

USD/CAD BoC

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Why Is This Event Important:

Fears of a slowing recovery in Canada may encourage BoC Governor Stephen Poloz to implement more ‘insurance’ measures to curb the ongoing slack in the real economy, and the Canadian dollar may face additional headwinds over the near to medium-term should the central bank head highlight a more dovish outlook for monetary policy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

International Merchandise Trade (MAY)

-2.55B

-3.34B

Retail Sales (MoM) (ARP)

0.7%

-0.1%

Gross Domestic Product (Annualized) (1Q)

0.3%

-0.6%

The BoC may further embark on its easing cycle as waning demand from home and abroad dampens the outlook for growth and inflation, and the central bank may keep the door open to implement additional monetary support in an effort to mitigate the downside risks surrounding the real economy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Housing Starts (JUN)

190.0K

202.8K

Existing Home Sales (MoM) (MAY)

--

3.1%

Consumer Price Index Core (YoY) (MAY)

2.1%

2.2%

However, sticky price growth paired with the ‘soft’ landing in the housing market may prompt the BoC to retain a wait-and-see approach, and the Canadian dollar may mount a near-term recovery should Goverenor Poloz talk down speculation for lower borrowing-costs.

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How To Trade This Event Risk(Video)

Bearish CAD Trade: BoC Cuts Benchmark Interest Rate to Record-Low

  • Need green, five-minute candle following the rate decision for a potential long USD/CAD trade.
  • If market reaction favors a bearish loonie trade, buy USD/CAD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bullish CAD Trade: Governor Poloz Preserves Wait-and-See Approach

  • Need red, five-minute candle to consider a short USD/CAD position.
  • Carry out the same setup as the bearish Canadian dollar trade, just in the opposite direction.

Read More:

USD/CAD Dips from Channel Resistance

Webinar: EUR & JPY Struggle Post Greek Deal- Weekly Setups in Focus

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • USD/CAD looks poised to resume the long-term bull trend as it breaks out of the triangle/wedge formation from March; waiting for a closing price above the 1.2800 handle for conviction/confirmation with the next topside region of interest coming in around 1.2940 (78.6% retracement) to 1.2950 (50% expansion).
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short USD/CAD since June 18, but the ratio remains near extremes as it sits at -2.76.
  • Interim Resistance: 1.2800 (38.2% expansion) to 1.2833 (March high)
  • Interim Support: 1.2360 (38.2% retracement) to 1.2380 (50% retracement)

Impact that the BOC 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 2015

05/27/2015 14:00 GMT

0.75%

0.75%

+43

+15

May 2015 Bank of Canada(BOC) Interest Rate Decision

USD/CAD Chart

The Bank of Canada (BoC) kept the benchmark rate unchanged at 0.75% for another month in May, with Governor Stephen Poloz turning increasingly optimistic towards the economy as the central bank head anticipates a strong recovery in the second-quarter of 2015. As a result, the BoC may continue to endorse a wait-and-see approach throughout the remainder of the year as the ‘emergency’ rate cut in March works its way through the real economy. Nevertheless, the Canadian dollar struggled to hold its ground following the rate decision, with USD/CAD snapping back from the 1.2425 region to end the day at 1.2450.

--- Written by David Song, Currency Analyst and Shuyang Ren

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

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