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USD/CAD Triangle/Wedge Formation at Risk on Wait-and-See BoC

USD/CAD Triangle/Wedge Formation at Risk on Wait-and-See BoC

David Song, Strategist

- Bank of Canada (BoC) to Keep Benchmark Interest Rate at 0.50%.

- Will Governor Stephen Poloz Endorse a Wait-and-See Approach?

For more updates, sign up for David's e-mail distribution list.

Trading the News: Bank of Canada Interest Rate Decision

Even though the Bank of Canada (BoC) is widely anticipated to keep the benchmark interest rate at 0.50%, the fresh batch of central bank rhetoric may trigger a near-term decline in USD/CAD should Governor Stephen Poloz and Co. endorse a wait-and-see approach for monetary policy.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The BoC may gradually move away from its easing cycle as Prime Minister Justin Trudeau expands the budget to support the real economy, and more of the same from the central bank may boost the appeal of the Canadian dollar as market participants scale back bets for a rate-cut.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Housing Starts (JUN)

189.5K

218.3K

Ivey Purchasing Manager Index (JUN)

51.2

51.7

Retail Sales (MoM) (APR)

0.8%

0.9%

The pickup in building activity accompanied by signs of stronger consumption may keep the BoC on the sidelines, and the loonie may catch a bid following the rate-decision should Governor Poloz highlight a neutral outlook for monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Net-Change in Employment (JUN)

5.0K

-0.7K

Consumer Price Index (YoY) (MAY)

1.6%

1.5%

Gross Domestic Product (Annualized) (1Q)

2.8%

2.4%

However, easing price pressures paired with the renewed weakness in employment may push the BoC to adopt a more dovish tone for monetary policy, and the Canadian dollar may face near-term headwinds should the central bank show a greater willingness to further embark on its easing cycle.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Headline & Core Rate of Inflation Slows in May

  • Need to see red, five-minute candle following the decision to consider a short trade on USD/CAD.
  • If market reaction favors a bullish loonie trade, sell USD/CAD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bearish CAD Trade: Canada CPI Report Beats Market Forecast

  • Need green, five-minute candle to favor a long USD/CAD trade.
  • Implement same setup as the bullish Canadian dollar trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart
  • USD/CAD may resume the long-term upward trend as the pair approaches the apex of the wedge/triangle formation, while the Relative Strength Index (RSI) threatens the bearish trend from earlier this year, but the dollar-loonie may revisit the June low (1.2653) should the Bank of Canada (BoC) show a greater willingness to gradually move away from its easing cycle.
  • Key Resistance: 1.3560 (100% expansion) to 1.3630 (38.2% retracement)
  • Key Support: 1.2510 (78.6% retracement) to 1.2520 (38.2% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

Impact that the Bank of Canada rate decision has had on USD/CAD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY

2016

05/25/2016

14:00 GMT

0.50%

0.50%

-45

-103

May 2016 Bank of Canada Interest Rate Decision

USD/CAD 5-Minute

USD/CAD Chart

As expected, the Bank of Canada (BoC) retained its current policy in May, with the central bank largely endorsing an upbeat outlook for the region as the economy is expected to ‘return to solid growth in 2016.’ Moreover, the BoC argued that ‘inflation is roughly in line with the Bank’s expectations’ even as the economy adjusts to the oil price shock, and it seems as though Governor Stephen Poloz and Co. will largely endorsee a wait-and-see approach throughout 2016 as the risks to the ‘inflation projection remain roughly balanced.’ The Canadian dollar gained ground following the rate-decision, with USD/CAD slipping below the 1.3050 area to end the day at 1.3017.

Get our top trading opportunities of 2016 HERE

Read More:

DAX: Upside Carnage Continues, Major Price Zone Next Stop

WTI Crude Oil Price Forecast: Bearish Price Channel Favors Downside Bias

COT-Unchartered Waters for Gold and Silver Positioning

USD/CAD is Fertile Ground; Watch Daily 8-EMA in GBP-crosses

--- 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.

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

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