Fundamental Analysis

Bank of Canada Decides Next on Rates; Expected to Stand Pat

Typography

Next on the list of central bank policy meetings is the Bank of Canada which is expected to follow its Australian counterparts and keep interest rates on hold at 1.0% at its last rate-decision for 2017 on Wednesday. Although the economy seems to be approaching full capacity conditions, the central bank is likely to maintain monetary stimulus for the moment as recent data indicated that the economy is growing at a slower pace, while inflation is still trending far below the central bank's target.

Last Friday, the Canadian unemployment rate dropped surprisingly to a nine-year low of 5.9% in November, while the labour market added 79,500 jobs in the aforementioned period, posting twelve consecutive months of gains and reaching the highest increase in four years. However, another report showed that annualized GDP growth weakened to 1.7% q/q in the third quarter from the previous mark of 4.3% (downwardly revised from 4.5%) due to lower exports and household spending as well as to a cooling housing market.

Besides that, Canadian households remain among the most highly indebted in the world as sluggish wage growth and higher interest rates render it difficult for them to meet their obligations, while inflation is still near the lower bound of the BOC's target range of 1-3.0% due to an appreciating local currency which pressures import prices. Given the previous, another rate hike tomorrow would not seem suitable under the current state of the economy.

Uncertainties surrounding NAFTA negotiations could be also one of the reasons for policymakers to avoid further rate increases. In their fifth round of negotiations ending on November 21, the US, Canada, and Mexico failed to make progress on key elements of the treaty, spreading fears to local companies whose trade activities are heavily dependent on the US economy.

The BOC has raised interest rates twice this year, but markets are currently pricing a 20% chance of another increase on Wednesday. However, the monetary policy statement following the decision at 1500GMT would be in main focus for any hawkish comments which could give a lift to the loonie.

Looking at the technical picture, dollar/loonie holds a neutral to bearish bias as the pair is currently trending slightly below the 50-day exponential moving average, while market action is trying to push the price below the range of 1.2612-1.2915. The RSI maintains a negative slope below 50, hinting that a correction might take place in the near-term. If the pair indeed moves down, immediate support could be met at the lower bound of the range at 1.2612. From here any violation of this point would shift focus to 1.2430, which has been tested repeatedly in October and consequently paint a clear bearish picture. The two-year low of 1.2060 could also act as a barrier to steeper decreases. On the upside, resistance is likely to come from the 200-day EMA at 1.2840 and the previous top of 1.2915. Any close above this level would shift focus to the 1.3000 key-level.

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