Trading the News: Bank of Canada Interest Rate Decision
What’s Expected:
Time of release: 07/19/2011 13:00 GMT, 9:00 EST
Primary Pair Impact: USDCAD
Expected: 1.00%
Previous: 1.00%
DailyFX Forecast: 1.00%
Why Is This Event Important:
The statement accompanying the Bank of Canada’s interest rate decision is likely to move the currency market as the central bank is widely expected to keep the benchmark interest rate at 1.00%, and Governor Mark Carney may continue to soften his dovish rhetoric for monetary policy as the economic recovery gathers pace. According to Credit Suisse overnight index swaps, market participants see borrowing costs increasingly by nearly 50bp over the next 12-months, and a rise in interest rate expectations should spur a bullish reaction in the Canadian dollar as investors weigh the outlook for monetary policy. However, as the marked appreciation in the local currency dampens the prospects for future growth, the BoC may strike a balanced tone for the region, and the rebound in the loonie may struggle to hold its ground, which could strengthen the rebound in the USD/CAD.
Recent Economic Developments
The Upside
Release | Expected | Actual |
Net Change in Employment (JUN) | 15.0K | 28.4K |
Gross Domestic Product (MoM) (MAY) | -0.1% | 0.0% |
Consumer Price Index (YoY) (MAY) | 3.3% | 3.7% |
The Downside
Release | Expected | Actual |
Manufacturing Sales (MoM) (MAY) | -0.2% | -0.8% |
Ivey Purchasing Manager Index s.a. (APR) | 65.5 | 57.8 |
Retail Sales (MoM) (APR) | 0.4% | 0.3% |
As consumer prices expand at the fastest pace since March 2003, heightening price pressures could lead the BoC to adopt a hawkish outlook for future policy, and the central bank may show an increased willingness to lift the key rate off of 1.00% in order to balance the risks for the region. However, as private sector consumption wanes, the central bank may talk down the risk for inflation, and Governor Carney may retain his pledge to ‘carefully consider’ future rate hikes as policy makers aim to encourage a sustainable recovery. Should the central bank continue to endorse its wait-and-see approach, the USD/CAD may continue to retrace the decline carried over from the end of June, and the exchange rate may make another run at 0.9900 as interest rate expectations falter.
Potential Price Targets For The Rate Decision
How To Trade This Event Risk
Trading the given even risk is certainly not as clear cut as some of our previous trades as the BoC is likely expected to keep the key rate on hold, but a hawkish policy statement could pave the way for a long Canadian dollar trade as market participants increase speculation for higher borrowing costs. Therefore, if the Governor Carney sees scope to raise borrowing costs later this year, we will need a red, five-minute candle following the announcement to generate a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing lot or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to protected our profits.
On the other hand, the slowdown in private sector consumption may lead the BoC to maintain a balanced tone for monetary policy, and the central bank may talk down speculation for higher interest rates as policy makers aim to encourage a sustainable recovery. As a result, if Governor Carney shows an increased willingness to keep the benchmark interest rate on hold throughout 20111, we will implement the same setup for a long USD/CAD trade as the short position laid out above, just in reverse.
Impact that the Bank of Canada Interest Rate Decision has had on CAD during the last meeting
Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
MAY 2011 | 5/31/2011 13:00 GMT | 1.00% | 1.00% | -53 | -40 |
May 2011 Bank of Canada Interest Rate Decision
As expected, the Bank of Canada kept the benchmark interest rate at 1.00% in May, but went onto say that ‘the considerable monetary policy stimulus currently in place will be eventually withdrawn’ as the economic recovery picks up. At the same time, the BoC reiterated that future rate hikes will be ‘carefully considered’ as policy makers see a slowdown in the second-quarter GDP, and the central bank is anticipated to carry its wait-and-see approach into the second-half of the year as the marked appreciation in the exchange rate dampens the outlook for future growth. Nevertheless, market participants see the BoC raising the benchmark interest rate by nearly 75bp over the next 12-months according to Credit Suisse overnight index swaps, and interest rate expectations should help to prop up the Canadian dollar as market participants weigh the outlook for future policy. Indeed, the less dovish rhetoric from BoC Governor Mark Carney sparked a bullish reaction in the Canadian dollar, pushing the USD/CAD back below 0.9700, and the loonie held its ground throughout the North American trade as the pair ended the day at 0.9680. |
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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com
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