Shift in USD/CAD Behavior to Gather Pace on Hawkish BoC Rhetoric
- Bank of Canada (BoC) to Keep Benchmark Interest Rate at 0.75%.
- Will Governor Poloz and Co. Prepare Households & Businesses for Higher Borrowing-Costs?
Trading the News: Bank of Canada (BoC) Interest Rate Decision
The Bank of Canada (BoC) interest rate may yield a limited reaction as the central bank is expected to keep the benchmark interest rate a 0.75%, but the accompanying policy statement may heighten the appeal of the Canadian dollar should Governor Stephen Poloz and Co. show a greater willingness to further normalize monetary policy.
The BoC may prepare households and businesses for higher borrowing-costs as ‘growth is broadening across industries and regions and therefore becoming more sustainable.’ In turn, USD/CAD may continue to trade to fresh yearly lows if the central bank talks up bets for another rate-hike in 2017.
Nevertheless, Governor Poloz and Co. may merely attempt to buy more time as ‘he Bank’s three measures of core inflation all remain below 2 per cent,’ and more of the same from the BoC may spark a near-term correction in the dollar-loonie exchange rate especially as the Federal Open Market Committee (FOMC) ‘expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.’
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|07/12/2017 14:00:00 GMT||0.75%||0.75%||-92||-156|
July 2017 Bank of Canada (BoC) Interest Rate Decision
USD/CAD 10-Minute Chart
The Bank of Canada (BoC) increased the benchmark interest rate for the first time since 2010, with the central bank largely endorsing a hawkish outlook for monetary policy as the ‘output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).’ The fresh comments suggest Governor Stephen Poloz and Co. are on course to implement higher borrowing-costs over the coming months as ‘the Bank expects inflation to return to close to 2 per cent by the middle of 2018.’ The Canadian dollar rallied following the 25bp rate-hike, with USD/CAD pushing below the 1.2800 handle to end the day at 1.2748.
How To Trade This Event Risk(Video)
Bullish CAD Trade: BoC Shows Greater Willingness to Deliver Another Rate-Hike in 2017.
- Need a red, five-minute candle following the rate decision to consider 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. 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 position, just in reverse.
Potential Price Targets For The Release
USD/CAD Daily Chart
- The shift in USD/CAD may continue to unfold over the remainder of the year as the pair trades to fresh 2017-lows, with the dollar-loonie exchange rate at risk for a further decline as it threatens the upward trend from back in 2012.
- At the same time, the Relative Strength Index (RSI) appears to be highlighting a bearish trigger as it struggles to preserve the upward trend from late-July; will keep a close eye on the oscillator as it approaches oversold territory, with a break below 30 raising the risk for further losses in USD/CAD as the downward momentum gathers pace.
- A break/close below the 1.2350 (38.2% expansion) hurdle opens up the next downside region of interest around 1.2210 (50% expansion) to 1.2250 (50% expansion) followed by the 1.2080 (61.8% expansion) region.
- Interim Resistance:1.2980 61.8% retracement) to 1.3030 (50% expansion)
- Interim Support: 1.2210 (50% expansion) to 1.2250 (50% retracement)
USD/CAD Retail Sentiment
Retail trader data shows 65.5% of traders are net-long with the ratio of traders long to short at 1.89 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.34092; price has moved 7.7% lower since then. The number of traders net-long is 1.3% lower than yesterday and 3.2% higher from last week, while the number of traders net-short is 4.9% higher than yesterday and 28.8% higher from last week.
--- Written by David Song, Currency Analyst
To contact David, e-mail email@example.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.