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BoC to Fuel Shift in USD/CAD Behavior with First Rate Hike Since 2010

BoC to Fuel Shift in USD/CAD Behavior with First Rate Hike Since 2010

2017-07-12 10:00:00
David Song, Strategist
Share:

- Bank of Canada (BoC) to Raise Benchmark Interest Rate Since 2010.

- Will Governor Stephen Poloz Point to Series of Rate-Hikes?

- Join DailyFX Currency Analyst David Song for LIVE Coverage of the BoC Rate Decision.

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

BoC Rate Decision

The shift in USD/CAD behavior may gather pace over the near-term should the Bank of Canada (BoC) normalize monetary policy in the second-half of 2017.

Why Is This Event Important:

The BoC is expected to raise the benchmark interest rate for the first time since 2010 as Governor Stephen Poloz drops the dovish outlook for monetary policy and argues that the rate cuts from 2015 ‘have done their job.’ In turn, the fresh developments coming out of the BoC may heighten the bullish sentiment surrounding the Canadian dollar if central bank lifts the benchmark interest rate off the record-low and sees scope to deliver higher borrowing-costs over the coming months. However, USD/CAD may stage a relief rally should the BoC defy market expectations and retain the current policy.

Impact that the BoC 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)

MAY

2017

05/24/2017 14:00 GMT

0.50%

0.50%

-80

-118

May 2017 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 10-Minute

USD/CAD Chart

The Bank of Canada (BoC) struck an improved outlook for the region even as the central bank kept the benchmark interest rate at the record-low, with Governor Stephen Poloz and Co. noting that ‘the Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging.’ Even though the BoC warns ‘very strong growth in the first quarter will be followed by some moderation in the second quarter,’ the central bank may continue to change its tune over the coming months as the economy appears to be on a more sustainable path. The Canadian dollar gained ground following the less-dovish tone, with USD/CAD slipping below the 1.3500 handle to end the day at 1.3404.

How To Trade This Event Risk(Video)

Bullish CAD Trade: BoC Delivers 25bp Hike, Endorses Hawkish Outlook

  • 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 & Co. Retains Status Quo, Attempt to Buy More Time

  • Need a green, five-minute USD/CAD candle to consider a short loonie position.
  • 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

  • Failure to retain theascending channel from 2016 suggests a material shift in market behavior is underway, with the longer-term bias for USD/CAD turning increasingly bearish as the BoC alters the outlook for monetary policy.
  • Nevertheless, the recent decline in the dollar-loonie exchange rate appears to be getting exhausted as the Relative Strength Index (RSI) comes off of oversold territory and threatens the downward trend carried over from May.
  • In turn, a bullish RSI trigger may emerge over the days ahead, with the monthly opening range in focus as the pair remains capped by the 1.3030 (50% expansion) hurdle; next topside region of interest comes in around 1.3130 (50% retracement0 to 1.3150 (78.6% retracement).
  • Interim Resistance: 1.3280 (50% retracement) to 1.3340 (50% expansion)
  • Interim Support: 1.2750 (78.6% retracement) to 1.2770 (38.2% expansion)
IG Sentiment

Track Retail Sentiment in Real-Time with the New Gauge Developed by DailyFX

Retail trader data shows 70.1% of traders are net-long USD/CAD with the ratio of traders long to short at 2.34 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.3481; price has moved 4.2% lower since then. The number of traders net-long is 0.2% lower than yesterday and 10.9% lower from last week, while the number of traders net-short is 10.4% lower than yesterday and 14.8% higher from last week.

--- 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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