BOC Interest Rate Decision This Week

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The BOC interest rate decision is scheduled at the end of this week on Friday. Based on the market consensus, we’re not going to see any meaningful shift in terms of the BOC monetary policy outlook. The BOC is widely expected to keep the benchmark interest rate at the record low of 0.5%. The BOC is not anticipated to hike rates until 2018 while on the other side of the monetary policy spectrum; we have the Fed, which has already hiked 3 times in the past 17 months. This only leaves the Canadian dollar exchange rate at risk.

The BOC will reveal not just its interest rate decision, but we’re also going to get an updated monetary policy report, which can give traders further outlook on the strength of the Canadian economy. During the last BOC meeting, Governor Poloz had a balanced rhetoric. The BOC also updated its 2017 growth forecast and they expect the output gap to close in the first half of 2018 so earlier than expected, but at the same time, it’s too early to conclude the economy is on a stable or sustainable path.

Based on the BOC assessment the CPI inflation headline of 2% is expected to fall back to 1.7% as the BOC continued to reiterate that considerable uncertainty remains in the market. In terms of the monetary policy outlook, there is no meaningful conviction that the BOC will be ready to move the interest rate off of record low.

“When combined with the firming outlook for oil prices and stretched negative market sentiment, we see attractive risk-reward in positioning for a USD/CAD retracement via downside option structures. We enter a USD/CAD 2m 1.34/1.31 put spread.” – citing Nomura FX Strategy Research.

USD/CAD Technical story ahead of BOC

The USD/CAD technical pattern remains bullish in the long-term. In the medium-term, the USD/CAD is trading above the yearly opening price 1.3415 which in essence can be the line in the sand for the bulls. To the upside, the big psychological number 1.4000 is the next big hurdle for the USD/CAD.

USDCAD vs OIL

Short-term the USD/CAD rally paused as we’ve seen oil prices rebound sharply. It’s been rumoured that OPEC nations and non-OPEC nations (Russia) are willing to extend their production cuts and the next OPEC meeting scheduled at the beginning of next month in Vienna.

The BOC interest rate decision can be the catalyst for a breakout of the current range that USD/CAD has established in the past 2 weeks. A failure to preserve this bullish formation will be signalled by a break below the big round number 1.3500.

Based on our Elliott Wave Analysis, we are USD/CAD to continue being pressured lower towards 1.3379 area before another potential move higher towards 1.4096 area. Going into this week BOC Rate Statement, we will be looking for short term sell opportunities.

Conclusion

The biggest threat to higher interest rate is the USA – Canada trade uncertainty which poses a notable downside risk to growth. It’s very unlikely that the BOC will even signal any shift in its interest rates policy anytime soon. With this in mind, we can safely assume that any USD/CAD false breakout to the downside should quickly fade away. Watch for the 1.3500 psychological number and the year opening price 1.3415 to hold the downside. However, a daily close below 1.3415 can signal a shift in the market sentiment.

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A self-taught trader, Kar Yong was once featured in Channel News Asia’s Money Mind Young Investor. He was also featured as a Social Guru on the eToro social trading platform where he led the path for more than a thousand traders in confusing market conditions by sharing his trading strategies through forums and blog posts. Today, he teaches his proprietary 4 Pillar Forex Trading Strategy to students from all over the world.

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