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Check CAD Fundamentals Before Trading the BoC Rate Decision

Check CAD Fundamentals Before Trading the BoC Rate Decision

2013-09-04 13:09:00
Benjamin Spier, Technical Strategist
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Before you decide to short or long the Loonie ahead of the Bank of Canada meeting, review the factors affecting USD/CAD

Canadian Dollar Fundamental Factors

IMPACT LEVEL

EVENT TITLE

EVENT EXPLANATION

EFFECT ON CURRENCY

LAST UPDATED

High

Monetary Policy

Poloz used his first public comments as Bank of Canada governor in June to say the central bank’s rates will rise with economic growth. He further said rates will remain consistent with inflation rates.

Former Governor Carney said in March that his policy interest rate is likely to be unchanged for some time because of inflation slowing more than projected, and when interest rates are changed, it will probably be an increase. Carney said in the past that he may be considering a rate hike despite slow growth, because of household debt levels.

The BoC kept the interest rate at 1.0% in July, as the interest rate has remain unchanged since September 2010.

Export Development Canada CEO Stephen Poloz was appointed to take over as the new Bank of Canada governor in June after Marc Carney left for the Bank of England.

As the central bank raises the interest rate, the price of the Canadian Dollar should go higher. A higher interest rate is CAD positive because it raises the yield for holding the currency and lowers the supply of CAD available to the market.

7/31/2013

High

Economic Growth (GDP)

Canada GDP increased 1.7%Y/Y in Q2, following 2.2% in Q1. Canada GDP declined 0.5% in June, the biggest monthly decline since 2009.

In July, the BoC said the Canadian economy will be choppy in the near term, but the central bank predicted that the economy will grow 1.8% in 2013, up from an April forecast for 1.5% growth in 2013.

Improved economic growth is CAD positive because the BOC considers economic performance and inflation before making a rate decision. For example, if economic performance is weak, the BoC may lower interest rates to stimulate the economy, which is CAD negative.

8/30/2013

Medium

Inflation

Annual inflation was reported at 1.3% in July, the highest inflation rate in a year and up from 1.2% in June.

The BoC's policy is to keep inflation between 1-3%, and inflation has remained below the central bank’s 2% target for 15 consecutive months.

Higher inflation is CAD positive because the BOC considers economic performance and inflation before making a rate decision. The BoC maintains a 2% inflation rate target, and the central bank may raise the target interest rate to drive inflation lower, or lower the target rate to send inflation higher.

8/23/2013

Medium

Employment

Employment fell by 39,400 in July, worse than the 400 person rise in employment seen in June. The unemployment rate rose to 7.2% in July from 7.1% in June.

Improved employment is CAD positive, as it indicates an improvement in economic performance.

8/9/2013

Low

Risk Correlation

The Canadian Dollar is a commodity currency because Canada exports oil and natural gas. Commodity consumption is often correlated with global economic performance, therefore the Loonie may correlate with risk trends.

USD/CAD saw a -0.45 correlation with the S&P 500 over the past year and 0.18 correlation for the past month. This means that the Canadian Dollar was somewhat correlated when trading against the US Dollar over the past year. However, over the past month, the pair has failed to follow usual risk trends.

As risk appetite rises, the Canadian Dollar has often risen against the US Dollar, but that correlation trend has failed over the past month.

Ongoing

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to instructor@dailyfx.com .

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

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