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USD/CAD Short Term Levels Ahead of BOC Rate Decision

USD/CAD Short Term Levels Ahead of BOC Rate Decision

Oded Shimoni, Junior Currency Analyst

Talking Points:

- USD/CAD displaying possible bottom picking attempts via SSI

- BOC rate decision the main event risk on the docket. Bank expected to keep rates unchanged.

- Oil link could provide an opportunity following the event

The USD/CAD is under pressure for the fifth consecutive day after falling sharply following Friday’s NFPs and an abysmal US Services ISM report yesterday.

With the Bank of Canada Rate Decision ahead and volatility in Crude Oil prices, the pair remains highly in focus.

Against this backdrop we will form our outlook and look to find short term trading opportunities using different tools such as the Grid Sight Index (GSI) indicator.

USD/CAD Short Term Levels Ahead of BOC Rate Decision

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The Bank of Canada Rate Decision is set to hit the wires 12:00 GMT, with the bank expected to keep rates unchanged at 0.5%.

Looking at rates implied probabilities, the market has a slight lean towards easing heading into 2017, but overall outlook sees the BOC remain on hold for the foreseeable future. Indeed, BOC Governor Stephen Poloz suggested the bank will step back from monetary stimulus until Trudeau’s fiscal measures take place.

The Canadian economy is recovering from the oil shock and a collapse in exports, which brought on a record trade gap for the country, but the nation’s trade deficit narrowed more than expected in the last read and exports (which Poloz emphasized as key for the economy’s recovery) were up 3.4%.

Taken together with the fact that Q2 GDP signaled a 0.6% increase in June (mitigating the 1.6% contraction due to the Alberta wildfires), the major headwind for the BOC at the moment appears to be the currency’s appreciation, which might suggest a slightly higher probability of a dovish lean in today’s meeting.

This could open up an opportunity if Oil keeps trading higher today. USD/CAD Crude Oil correlation has reduced lately, with 10-day correlation at -0.12 at the time of writing- hardly impressive, as recent movements in the pair were more a story of US Dollar weakness. If the USD/CAD experiences a knee-jerk spike higher on a dovish Poloz, Canadian Dollar bulls might take advantage of higher prices with rising oil prices to lean on as the correlation starts to kick in again (as it usually does).

USD/CAD Technical Levels:

USD/CAD Short Term Levels Ahead of BOC Rate Decision

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We use volatility measures as a way to better fit our strategy to market conditions. The USD/CAD is seeing volatility lower lately according to 20-day ATR measures, like the markets in general in the last months, even though we did see a pickup in activity in the last few days.

In turn this might suggest that the longer term tech level could hold in the short term.

USD/CAD 30-Min Chart (With the GSI Indicator): September 7, 2016

USD/CAD Short Term Levels Ahead of BOC Rate Decision

(Click to Enlarge)

The USD/CAD is trading at a support at 1.2837, with GSI calculating slightly higher percentages of past movement to the downside in the short term.

The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns. By matching events in the past, GSI describes how often the price moved in a certain direction.

You can learn more about the GSI here.

Other levels of support may be the area below 1.28, 1.2764 and 1.27.

Levels of resistance might be 1.2860, 1.29, 1.2950 and 1.2980.

We generally want to see GSI with the historical patterns significantly shifted in one direction, which alongside a pre-determined bias and other technical tools could provide a solid trading idea that offer a proper way to define risk.

We studied over 43 million real trades and found that traders who successfully define risk were three times more likely to turn a profit.

Read more on the Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 59.6% of traders are long the USD/CAD at the time of writing, offering a short bias on a contrarian basis.

You can find more info about the DailyFX SSI indicator here

--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com

Follow him on Twitter at @OdedShimoni

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

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