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

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

2018-10-24 12:08:00
David Song, Currency Strategist
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Trading the News: Bank of Canada (BoC) Interest Rate Decision

The Bank of Canada (BoC) meeting may shake up the near-term outlook for USD/CAD as the central bank is expected to increase the benchmark interest rate to 1.75% from 1.50%.

Image of DailyFX economic calendar

A 25bp rate-hike paired with a hawkish policy statement may trigger a bullish reaction in the Canadian dollar as the updates suggest Governor Stephen Poloz & Co. will step up the pace to normalize monetary policy, and a material shift in the forward-guidance may curb the recent advance in USD/CAD as market participants prepare for a faster hiking-cycle.

However, a dovish BoC rate-hike may trigger fresh monthly highs in the dollar-loonie exchange rate as it suggests the central bank will carry a wait-and-see approach into 2019, and the Canadian dollar may continue to lose ground against its U.S. counterpart especially as the Federal Reserve warns of above-neutral interest rates. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

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)

SEP

2018

09/05/2018 14:00:00 GMT

1.50%

1.50%

+32

+14

September 2018 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 5-Minute Chart

Image of usdcad 5-minute chart

As expected, the Bank of Canada (BoC) kept the benchmark interest rate on hold at 1.50%, and it seems as though the central bank is in no rush to implement higher borrowing-costs as ‘GDP growth is expected to slow temporarily in the third quarter, mainly because of further fluctuations in energy production and exports.’ Nevertheless, it seems as though the BoC will continue to normalize monetary policy over the coming months as ‘recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target.’

The Canadian dollar struggled to hold its ground despite the hawkish forward-guidance, with USD/CAD bouncing back from the 1.3160 region to close the day at 1.3177. Review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

USD/CAD Daily Chart

Image of usdcad daily chart
  • USD/CAD appears to be threatening the bearish formation from June as it comes up against channel resistance, but the failed attempts to break/close above the 1.3130 (61.8% retracement) hurdle may undermine the recent advance in the exchange rate as it initiates a fresh series of lower highs & lows.
  • In turn, the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) area sits on the radar, with a break/close below the stated region raising the risk for a move back towards 1.2830 (38.2% retracement).
  • However, recent developments in the Relative Strength Index (RSI) casts a bullish outlook for USD/CAD as the oscillator appears to be breaking out of the bearish formation.
  • With that said, a break/close above the 1.3130 (61.8% retracement) hurdle may spark a run at the September-high (1.3226), with the next region of interest coming in around 1.3290 (61.8% expansion) to 1.3310 (50% 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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