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Bank of Canada (BoC) Preview: Dovish Rate Hike to Fuel USD/CAD Rebound

Bank of Canada (BoC) Preview: Dovish Rate Hike to Fuel USD/CAD Rebound

David Song, Strategist

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

The Bank of Canada (BoC) interest rate decision may sap the recent rebound in the USD/CAD exchange rateas the central bank is widely expected to deliver a 25bp rate-hike.

Image of DailyFX economic calendar

The BoC may continue to normalize monetary policy in the second-half of 2018 as ‘activity in the first quarter appears to have been a little stronger than projected,’ and Governor Stephen Poloz and Co. may continue to prepare households and businesses for higher borrowing-costs as ‘developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.

In turn, a 25bp increase in the benchmark interest rate paired with a hawkish policy statement may trigger a bullish reaction in the Canadian dollar, but a dovish rate-hike may fuel the recent rebound in USD/CAD as market participants scale back bets for a more aggressive hiking-cycle. Sign up & join DailyFX Currency Analyst Christopher Vecchio LIVE to cover the BoC interest rate decision.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY

2018

05/30/2018 14:00:00 GMT

1.25%

1.25%

-128

-136

May 2018 Bank of Canada (BoC) Interest Rate Decision

USD/CAD10-Minute Chart

Image of USDCAD 5-Minute Chart

The Bank of Canada (BoC) endorsed a hawkish outlook for monetary policy after keeping the benchmark interest rate on hold in May as ‘inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April.’ The recent comments suggest the BoC will continue to normalize monetary policy in 2018 as ‘developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.’

The Canadian dollar rallied following the hawkish rhetoric, with USD/CAD slipping below the 1.29000 handle to end the day at 1.2873.

USD/CAD Daily Chart

Image of USD/CAD daily chart
  • Broader outlook for USD/CAD remains constructive as the exchange rate appears to be responding to trendline support, but the Relative Strength Index (RSI) highlights a different dynamic as the oscillator fails to preserve the bullish formation from earlier this year.
  • At the same time, failure to test the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region instills a constructive outlook for USD/CAD especially as the pair snaps the series of lower highs & lows from the previous week.
  • With that said,need a closing price above the 1.3130 (61.8% retracement) hurdle to favor a larger recovery, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3310 (50% retracement) followed by the Fibonacci overlap around 1.3420 (78.6% retracement) to 1.3460 (61.8% retracement).

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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