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BoC Preview: USD/CAD Bearish Sequence to Unravel on Dovish Rate-Hike

BoC Preview: USD/CAD Bearish Sequence to Unravel on Dovish Rate-Hike

2018-01-17 10:00:00
David Song, Strategist
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- Bank of Canada (BoC) to Increase Benchmark Interest Rate to 1.25%.

- Will Governor Poloz & Co. Implement a Dovish Rate-Hike?

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

BoC Rate Decision

The Bank of Canada (BoC) is expected to increase the benchmark interest rate at its first meeting in 2018, but a dovish rate-hike may undermine the recent decline in USD/CAD as market participants scale back bets for higher borrowing-costs.

Unlike 2017, Governor Stephen Poloz and Co. may quickly tame expectations for a series of rate-hikes as ‘the global outlook remains subject to considerable uncertainty, notably about geopolitical developments and trade policies.’ As a result, a less-hawkish forward guidance may ultimately trigger a bearish reaction in the Canadian dollar as market participants push out bets for next BoC rate-hike.

However, the central bank may adopt a more aggressive approach to normalize monetary policy as ‘inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors,’ and the dollar-loonie exchange rate may exhibit a more bearish behavior over the near-term should the BoC show a greater willingness to deliver another rate-hike over the coming months.

Impact that the BoC rate decision has had on USD/CAD during the previous meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

DEC

2017

12/06/2017 14:00:00 GMT

1.00%

1.00%

+107

+129

December 2017 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 5-Minute Chart

USD/CAD Chart

The Bank of Canada (BoC) continued to endorse a wait-and-see approach at its last meeting in 2017, with Governor Stephen Poloz and Co. keeping the benchmark interest rate at 1.00% as ‘recent Canadian data are in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017.

The fresh remarks suggest the BoC is no rush to further normalize monetary policy as ‘Governing Council judges that the current stance of monetary policy remains appropriate,’ but the central bank may continue to prepare Canadian households and businesses for a less accommodative stance as officials warn ‘higher interest rates will likely be required over time.’

The Canadian dollar struggled to hold its ground following the rate decision, with USD/CAD rising above the 1.2700 region to end the day at 1.2788. Thinking of trading the BoC meeting but don’t have a strategy? Download & review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

USD/CAD Daily Chart

USD/CAD Daily Chart

Interested in trading? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

  • Near-term outlook for USD/CAD remains tilted to the downside as the pair carves a fresh series of lower highs & lows following the failed attempt to push back above the former-support zone around 1.2620 (50% retracement).
  • Next downside target comes in around 1.2350 (38.2% expansion), which sits just beneath the monthly-low (1.2355), with the next downside region of interest coming in around 1.2210 (50% expansion) to 1.2250 (50% retracement) followed by the 1.2080 (61.8% expansion) region.
  • Keeping a close eye on the Relative Strength Index (RSI) as it extends the bearish formation from late-2017, but lack of momentum to break below 30 raises the risk for a near-term rebound in the exchange rate.

Want more insight? Sign up & join DailyFX Currency Analyst David Song LIVEto cover the BoC interest rate decision!

--- Written by David Song, Currency Analyst

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

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