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USD/CAD Snaps Bullish Series- Outlook Hinges on BoC Guidance

USD/CAD Snaps Bullish Series- Outlook Hinges on BoC Guidance

David Song, Strategist

- Bank of Canada (BoC) to Keep Benchmark Interest Rate at 1.25% in March. Governor Stephen Poloz and Co. May Endorse Wait-and-See Approach Following Dovish Rate-Hike in January.

- USD/CAD Rally Appear to Be Getting Exhausted as Bullish Sequence Stalls. Relative Strength Index (RSI) Falls Back from Overbought Territory & Approaches Trendline Support.

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

DailyFX Calendar

The Bank of Canada (BoC) meeting may spark a limited reaction as the central bank is widely expected to keep the benchmark interest rates on hold, and Governor Stephen Poloz and Co. may merely attempt to buy more time as ‘as uncertainty about the future of NAFTA is weighing increasingly on the outlook.’

The BoC may sound more cautious this time around as U.S. President Donald Trump unveils a 25% tariff on imported steel and a 10% tariff on imported aluminum, and the accompanying statement may trigger a bearish reaction in the Canadian dollar if the central bank shows a greater willingness to carry the current policy into the second-half of 2018.

Keep in mind, the BoC is likely to reiterate that ‘the economic outlook is expected to warrant higher interest rates over time’ as the economy approaches full capacity, and the central bank may have little choice but to prepare Canadian households and businesses for higher borrowing-costs especially as ‘growth is expected to remain above potential through the first quarter of 2018.’ As a result, an unexpected batch of hawkish rhetoric may fuel a more meaningful pullback in USD/CAD as it fuels bets for an imminent BoC rate-hike.

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)

JAN

2018

01/17/2018 15:00:00 GMT

1.25%

1.25%

-5

-29

January 2018 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 10-Minute Chart

USD/CAD 10-Minute Chart

The Bank of Canada (BoC) increased the benchmark interest rate to 1.25% in January as ‘recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.’ However, unlike 2017, it seems as though the central bank will refrain from delivering a series of rate-hikes as ‘some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.

The Canadian dollar struggled to hold its ground following the dovish rate-hike, but the reaction was short-lived, with USD/CAD pulling back to end the day at 1.2435. Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

USD/CAD Daily Chart

USD/CAD Daily Chart

Varying market conditions require alternative strategies as trends change. Want a better understanding of the different approaches for trading? Unlock the DailyFX Advance trading guide.

  • Topside targets remain on the radar for USD/CAD following the break of the December-high (1.2920), but the near-term outlook is getting clouded with mixed signals as the pair snaps the series of higher highs & lows carried over from the previous week.
  • Will keep a close eye on the Relative Strength Index (RSI) as it struggles to hold above 70 and falls back towards trendline support, with a break of the bullish formation raising the risk for a larger pullback in the dollar-loonie exchange rate.
  • String of failed attempts to break/close above the 1.3290 (61.8% expansion) to 1.3310 (50% retracement) region may generate a larger pullback in USD/CAD, with a move back below the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion) bring the downside targets back on the radar as the near-term rally in the exchange rate appears to be getting exhausted.

Want More Insight? Sign up & join DailyFX Currency Analyst David Song LIVEto cover the BoC rate decision.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.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.

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