USD/CAD to Reverse Course on Dovish BoC Monetary Policy Statement
- Bank of Canada (BoC) to Keep Benchmark Interest Rate at 0.50%.
- Will Governor Stephen Poloz and Co. Trim Their Economic Forecasts?
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Trading the News: Bank of Canada Interest Rate Decision
The Canadian dollar may show a limited reaction to the Bank of Canada’s (BoC) October interest rate decision as Governor Stephen Poloz and Co. are expected to retain the current policy, but the near-term decline in USD/CAD may largely unravel should the monetary policy report fuel bets for more easing.
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Why Is This Event Important:
The BoC may show a greater willingness to implement lower borrowing-costs as the ‘risks to the profile for inflation have tilted somewhat to the downside since July,’ and a reduction in the central bank’s economic projections may drag on the local currency as market participants boosts bets for additional monetary support. However, Governor Poloz and Co. may continue to advocate a wait-and-see approach as the central bank anticipates a ‘substantial rebound’ in the second-half of 2016, and the fresh comments may boost the appeal of the Canadian dollar should the committee sound upbeat this time around.
Expectations: Bullish Argument/Scenario
|Housing Starts (SEP)||190.0K||220.6K|
|Ivey Purchasing Manager Index s.a. (SEP)||53.1||58.4|
|Net Change in Employment (SEP)||7.5K||67.2K|
The ongoing expansion in the housing market accompanied by the sharp pickup in employment may push the BoC to raise its fundamental assessment of the real economy, and the Canadian dollar may face a bullish reaction should Governor Poloz talk down bets for a rate-cut.
Risk: Bearish Argument/Scenario
|BoC Senior Loan Officer Survey (3Q)||--||3.3|
|Consumer Price Index Core (YoY) (AUG)||2.0%||1.8%|
|Retail Sales (MoM) (JUL)||0.1%||-0.1%|
However, waning price pressures paired with the slowdown in private-sector consumption may sway the BoC to reestablish its easing cycle, and the dollar-loonie may work its way back towards the monthly high (1.3313) should the fresh developments coming out of the central bank fuel expectations for lower borrowing-costs.
How To Trade This Event Risk(Video)
Bullish CAD Trade: BoC Advocates 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: Monetary Policy Statements Boosts 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
Chart - Created Using Trading View
- Failure to test the monthly opening range accompanied with the recent series of lower-highs raises the risk for a further decline in USD/CAD especially as the Relative Strength Index (RSI) fail to preserve the bullish formation carried over from August; break/close below the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.2990 (23.6% retracement) may spur a test of the upward trend from the May low (1.2461).
- Interim Resistance: 1.3300 (50% retracement) to 1.3310 (38.2% retracement)
- Interim Support: 1.2764 (August low) to 1.2770 (38.2% expansion)
Check out the short-term technical levels that matter for USD/CAD heading into the report!
Impact that the Bank of Canada rate decision has had on USD/CAD during the last meeting
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
September 2016 Bank of Canada Interest Rate Decision
The Bank of Canada (BoC) stuck to the sidelines and held the benchmark interest rate at 0.50% in September even as the central bank warned the ‘risks to the profile for inflation have tilted somewhat to the downside since July.’ Governor Stephen Poloz and Co. largely endorse a wait-and-see approach for monetary policy as the central bank anticipates a ‘substantial rebound in the second half of this year,’ and it seems as though the BoC will continue to lean of fiscal authorities to support the real economy as ‘the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate.’ Nevertheless, the Canadian dollar struggled to hold its ground following the dovish remarks, with USD/CAD climbing above the 1.2850 region to end the day at 1.2883.
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--- Written by David Song, Currency Analyst
To contact David, e-mail firstname.lastname@example.org. Follow me on Twitter at @DavidJSong.
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