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USD/CAD Risks Larger Pullback on Less-Dovish BoC

USD/CAD Risks Larger Pullback on Less-Dovish BoC

2017-05-24 11:29:00
David Song, Strategist
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- Bank of Canada (BoC) to Keep Benchmark Interest Rate at Record-Low of 0.50%.

- Will Governor Stephen Poloz and Co. Stick to Current Script?

Trading the News: Bank of Canada (BoC) Interest Rate Decision

BoC Rate Decision

The Bank of Canada (BoC) interest rate decision may undermine the recent pullback in USD/CAD as Governor Stephen Poloz and Co. are expected to endorse a wait-and-see approach for monetary policy, but the central bank may slowly change its tune as ‘the output gap is projected to close in the first half of 2018, a bit sooner than the Bank anticipated in January.’

Why Is This Event Important:

The ongoing improvement in the labor market accompanied by the pickup in private-sector spending may encourage the BoC to adopt an improved outlook for the region, and the fresh batch of central bank rhetoric may boost the appeal of the Canadian dollar should the committee show a greater willingness to normalize monetary policy sooner rather than later.

Nevertheless, the BoC may merely attempt to buy more time as inflation is expected to ‘return to 2 per cent later in the projection horizon,’ and the Canadian dollar may face a bearish reaction should the central bank stick to the current script and tame expectations for higher borrowing-costs.

Have a question about the currency markets? Join a Trading Q&A webinar and ask it live!

Impact that BoC interest rate decision has had on USD/CAD during the lastmeeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR

2017

04/12/2017 14:00 GMT

0.50%

0.50%

-31

-61

April 2017 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 5-Minute

USD/CAD Chart

As expected, the Bank of Canada (BoC) kept the benchmark interest rate at the record-low of 0.50%, and the central bank appears to be in no rush to move away from its accommodative policy stance as Governor Stephen Poloz and Co. warn ‘it is too early to conclude that the economy is on a sustainable growth path.’ Nevertheless, the BoC noted that ‘growth in Canada is expected to moderate but remain above potential’ amid the positive developments coming out of the region, and the central bank may slowly change its tune over the coming months especially as ‘the output gap is projected to close in the first half of 2018, a bit sooner than the Bank anticipated in January.’ Despite the limited market reaction, the Canadian dollar gained ground following the rate decision, with USD/CAD ending the day at 1.3246.

How To Trade This Event Risk(Video)

Bullish CAD Trade: BoC Highlights Improved Outlook, Softens Dovish Tone

  • Need a red, five-minute candle following the rate decision to favor a short USD/CAD position.
  • If market reaction favors a bullish loonie trade, sell USD/CAD with two separate lots.
  • Set stop at the near-by swing high/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.

Bearish CAD Trade: Governor Poloz and Co. Continue to Endorse Wait-and-See Approach

  • Need a green, five-minute USD/CAD candle to consider a short loonie trade.
  • Implement the same setup as the bullish loonie trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using Trading View

  • USD/CAD stands at risk for a larger pullback as it extends the series of lower highs & lows from the previous week, while the Relative Strength Index (RSI) retains the bearish tilt from earlier this month.
  • Future observations in the momentum indicator may signal a potential shift in market behavior as it threatens the bullish formation from December, but keep in mind the broader outlook for USD/CAD remains constructive as the pair continues to operate within the upward trending channel carried over from 2016.
  • The lack of momentum to break/closes below the former-resistance zone around 1.3440 (38.2% expansion) to 1.3460 (61.8% retracement) may curb the near-term weakness, with the pair at risk of facing range-bound conditions as a major U.S. holiday weekend quickly approaches; first topside hurdle comes in around 1.3560 (50% expansion) to 1.3570 (61.8% expansion) followed by 1.3630 (38.2% retracement) to 1.36670 (78.6% expansion).
  • Interim Resistance: 1.3790 (100% expansion) to 1.3840 (61.8% retracement)
  • Interim Support: 1.3280 (50% retracement) to 1.3310 (38.2% retracement)

Make Sure to Check Out the DailyFX Guides for Additional Trading Ideas!

IG Sentiment

Retail trader data shows 40.1% of traders are net-long USD/CAD with the ratio of traders short to long at 1.49 to 1. In fact, traders have remained net-short since April 18 when USD/CAD traded near 1.33315; price has moved 1.4% higher since then. The percentage of traders net-long is now its highest since April 14 when USD/CAD traded near 1.33242. The number of traders net-long is 1.9% higher than yesterday and 13.2% higher from last week, while the number of traders net-short is 15.3% lower than yesterday and 33.5% lower from last week. For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

--- 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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