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USD/CAD to Extend Losses on Wait-and-See Bank of Canada (BoC)

USD/CAD to Extend Losses on Wait-and-See Bank of Canada (BoC)

2016-09-07 10:00:00
David Song, Strategist
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- Bank of Canada (BoC) to Hold Benchmark Interest Rate at 0.50%.

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

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Trading the News: Bank of Canada Interest Rate Decision

The Canadian dollar may extend the advance from the previous week, with USD/CAD at risk of give back the rebound from the August low (1.2763) should the Bank of Canada (BoC) largely endorse a wait-and-see approach for monetary policy.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Even though the BoC anticipates ‘the output gap will close somewhat later than estimated in April,’ Governor Stephen Poloz may show a greater willingness to retain the current policy through the remainder of the year as ‘inflation in Canada is on track to return to 2 percent in 2017 as the complex adjustment underway in Canada’s economy proceeds.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (JUL)

2.1%

2.1%

CFIB Business Barometer (AUG)

59.8

51.7

Ivey Purchasing Manager Index (JUL)

--

57.0

Sticky price growth accompanied by the pickup in business sentiment may keep the BoC on the sidelines, and more of the same from Governor Poloz and Co. may heighten the appeal of the Canadian dollar as market participants scale back bets for additional monetary support.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (Annualized) (2Q)

-1.5%

-1.6%

Retail Sales (MoM) (JUN)

0.5%

-1.0%

Net Change in Employment (JUL)

10.0K

-31.2K

However, the economic contraction triggered by the Alberta fires paired with the sharp slowdown in job growth may push the BoC to adopt a more dovish tone for monetary policy, and the loonie may struggle to hold its ground should the central bank show a greater willingness to reestablish its easing cycle.

How To Trade This Event Risk(Video)

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

  • 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: BoC Statement Fuels Bets for Additional Monetary Support

  • 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
  • Failure to test the August high (1.3199) raises the risk for a further decline in USD/CAD especially as the Relative Strength Index (RSI) preserves the bearish formation from earlier this year, with the first downside region of interest coming in around 1.2740 (50% expansion) to 1.2763 (August low), followed by 1.2620 (50% retracement) to 1.2650 (50% retracement).
  • 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)

JUL

2016

07/13/2016

14:00 GMT

0.50%

0.50%

-93

-90

July 2016 Bank of Canada Interest Rate Decision

USD/CAD 5-Minute

USD/CAD Chart

The Bank of Canada (BoC) kept the benchmark interest rate unchanged at 0.50% in July as ‘the fundamentals remain in place for a pickup in growth over the projection horizon,’ with the central bank anticipating ‘above-potential growth from the second half of 2016, lifted by rising US demand and supported by accommodative monetary and financial conditions.’ Even though the BoC warns ‘the output gap will close somewhat later than estimated in April,’ it seems as though Governor Stephen Poloz will continue to endorse a wait-and-see approach for monetary policy as ‘inflation has recently been a little higher than anticipated, largely due to higher consumer energy prices.’ The Canadian dollar gained against its U.S. counterpart following the upbeat tone from the BoC, with USD/CAD slipping below the 1.3000 handle to end the day at 1.2976.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Unofficial End of Summer is Here, Price Movement Set to Pick Up

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Timing the Crude Oil Low

Technical Focus: Big Test in USD/ZAR

--- Written by David Song, Currency Analyst

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

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

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