Trading the Bank of Canada Interest Rate Decision

Trading the News: Bank of Canada Interest Rate Decision

What’s Expected:

Time of release: 04/12/201113:00 GMT, 9:00 EST

Primary Pair Impact: USDCAD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%

Why Is This Event Important:

A Bloomberg News survey shows all of the 28 economists polled forecast the Bank of Canada to hold the benchmark interest rate at 1.00% in April, but the policy statement accompanying the rate decision is likely to spark increased volatility in the exchange rate as investors expect to see higher borrowing costs over the coming months. According to Credit Suisse overnight index swaps, market participants are pricing the key interest rate to increase by nearly 100bp over the next 12-months, but the central bank may retain its pledge to “carefully consider” future rate hikes given the substantial margin of slack within the real economy. In turn, dovish comments from BoC Governor Mark Carney is likely to spark a bearish reaction in the Canadian dollar, and a reversal in the USD/CAD should push the exchange rate back towards former support around 0.9700 as interest rate expectations falter.

Recent Economic Developments

The Upside

Release	Expected	Actual
Housing Starts (MAR)	181.0K	188.8K
Ivey Purchasing Manager Index s.a. (MAR)	62.0	73.2
Gross Domestic Product (YoY) (JAN)	3.1%	3.3%

The Downside

Release	Expected	Actual
Net Change in Employment (MAR)	28.0K	-1.5%
Retail Sales (JAN)	1.0%	-0.3%
Consumer Price Index (YoY) (FEB)	2.3%	2.2%

As the economic recovery in Canada gathers pace, with businesses increasing their rate of spending, the ongoing expansion in private sector activity may encourage the central bank to tighten monetary policy further in the first-half of the year as the outlook for growth and inflation improves. However, as households scale back on consumption, with employment contracting for the first time since in six-months, the BoC may retain its wait-and-see approach over the near-term in order to encourage a sustainable recovery. In turn, central bank Governor Carney talk down speculation for higher interest rates, and dovish remarks from the BoC should spark a reversal in the USD/CAD as investors curb speculation for higher borrowing costs.

Potential Price Targets For The Rate Decision

How To Trade This Event Risk

Trading the BoC interest rate decision is certainly not as clear cut as some of our previous trades, but the market reaction to the policy statement could pave the way for a long Canadian dollar trade as the central bank sees the economic recovery proceeding faster than initial expected. Therefore, if Governor Carney holds an improved outlook for the region and sees scope to normalize monetary policy further in the first-half of the year, we will need a red, five-minute candle subsequent to the rate decision in order generate a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, 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 an effort to lock-in our profits.

On the other hand, the BoC may retain a cautious tone for the region given the ongoing slack within the real economy, and the central bank may retain its pledge to carefully consider future rate hikes as the fundamental outlook remains clouded with high uncertainty. As a result, if Governor Carney talks down speculation for higher borrowing costs, we will carry out the same setup for a long dollar-loonie trade as the short position outlined 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)
Mar 2011	3/01/2011 14:00 GMT	1.00%	1.00%	+18	+27

March 2011 Bank of Canada Interest Rate Decision

The Bank of Canada kept the benchmark interest rate at 1.00% in March given the “considerable slack” within the real economy, and reiterated its pledge to “carefully consider” future rate hikes as the fundamental outlook remains clouded with high uncertainty. The BoC said that the region continues to face “considerable challenges” as the marked appreciation in the local currency dampens the prospects for global trade, and continued to see “poor relative productivity” as private sector demands remain subdued. At the same time, the BoC noted that the recovery is proceeding “slightly faster than expected” as the economic activity in the U.S., Canada’s largest trading partner, gathers pace, and the central bank may retain its wait-and-see approach throughout the first-half of the year in an effort to encourage a sustainable recovery. Indeed, currency traders showed a bearish reaction to the mixed rhetoric from the BoC, with the USD/CAD advancing to a high of 0.9754, but the market reaction tapered off going into the end of the day as the exchange rate closed at 0.9736.