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Canadian Dollar Looks to BoC Rate Decision, Inflation for Next Moves

Canadian Dollar Looks to BoC Rate Decision, Inflation for Next Moves

2010-07-16 21:13:00
Michael Wright, Currency Analyst
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Looking ahead at this week’s rate decision, market participants are sure to keep a close eye on any comments trailing the highly anticipated decision. As of late, Deputy Governor Time Lane stated that “the extent and timing of any additional withdrawal of monetary stimulus would depend on how the outlook for economic activity and inflation evolves.” If a similar statement arises, this would indeed send a hawkish message. However, at last month’s rate decision, the central bank publicized that “any further reduction in monetary stimulus would have to be weighed carefully against domestic and global economic developments.” This was in turn more cautious than traders had expected. Thus, going into this week, we do not rule out volatility in the USD/CAD on Monday, ahead of the central bank’s rate decision. Traders are likely to ponder if policy makers will take the similar approach as last meeting by raising rates but at the same time, confess that risks remain to the downside in light of the European crisis.

Indeed, the fundamental developments in Canada thus far gives reason for a rate hike. Economic activity in the first quarter advanced at the fastest pace quarterly pace in more than a decade, while the loonies’ employment figures posted a third consecutive monthly advance. During this past week, we saw manufacturing sales extend an eight month advance, while new motor vehicle sales gained 0.2 percent. Automobile sales are of particular note in that a sale of “big-ticket” items gives insight into consumer’s spending ability. For this upcoming week, the BoC rate decision will kick off price action, while figures in retail trade and inflation will likely give reason for any hawkish/dovish comments from policy makers on Tuesday.

There is no clear development with regards to price this upcoming week as the recent break above the 200-day SMA has not been as sufficient as other currency pairs. However, we do not rule out a test of the 61.8 percent Fibonacci retracement on the 5/25, 6/21 downswing before the pair reverses course. At the same time, our speculative sentiment index stands at 1.32, signaling for losses, however, a flip in the ratio can transpire. All in all, we would recommend staying to the sidelines ahead of the rate decision on Tuesday, and wait for comments from policy makers before considering a trade. - MW

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