USD/CAD: Trading the Bank of Canada Interest Rate Decision

Trading the News: Bank of Canada Rate Decision

What's Expected

Time of release: 01/20/2009 14:00 GMT, 09:00 EST
Primary Pair Impact: USDCAD
Expected: 1.00%
Previous: 1.50%

Impact of the Bank of Canada Rate Decision on USDCAD over the last Three Meetings

December 2008 Bank of Canada Rate Decision

BoC Governor Mark Carney stated that the world's eighth largest economy 'is now entering a recession,' and cut the benchmark interest rate to its lowest level since 1958 as policy makers expect a 'broader and deeper' downturn in the global economy. The central bank lowered the key rate by 75bp to 1.50% amid expectations for a 50bp cut, as is expected to ease policy further as the bank attempts to keep the economy afloat. Moreover, as the central bank expects the annual rate of inflation to fall to 1.6% in 2009, easing prices pressures will certainly allow the Bank of Canada to lower borrowing costs further as policy makers try to maintain the 2% target for price growth. Falling commodity prices paired with deteriorating fundamentals have dragged on the Canadian dollar, and the loonie is likely to face increased selling pressures over the near-term as the BoC is anticipated to continue its easing cycle.

October 2008 Bank of Canada Rate Decision

The Bank of Canada pushed borrowing costs to a four year low as they cut the benchmark interest by 25bp to 2.25% following the coordinated rate cut on October 8th. The BoC unexpectedly joined the Fed to stem the spillover effects of the financial crisis as they lowered the key interest rate to 2.50% from 3.00%, and may ease policy further over the coming months as growth prospects for the world's eighth largest economy deteriorate. Governor Mark Carney said that 'further monetary stimulus will likely be required' as demands from the global economy falter, and lowered the 2008 growth forecast to 0.6% from 1.0% as they expect the economic downturn to last longer than initially expected. The commentary suggests that the central bank will ease policy further over the coming months as growth fears intensify, which could stoke increased selling pressures for the Canadian dollar as investors raise bets for a BoC rate cut.

September 2008 Bank of Canada Rate Decision

The BoC held continued to hold the benchmark interest rate steady at 3.00% for the third straight meeting, stating that borrowing costs are 'appropriately accommodative.' Despite the neutral policy stance taken on by the central bank, economic activity has clearly deteriorated throughout the first half of the year as the economy grew at an annual pace of only 0.3% in the second quarter. Meanwhile, the inflation rate jumped to 3.4% in July, climbing above the bank's 3% limit for the first time since 2003. The Bank of Canada noted that they expect inflation to moderate next year, and went onto say that the deprecation in the Canadian dollar should help to support economic growth going forward.

How To Trade This Event Risk

The Canadian dollar is likely to face increased selling pressures over the next 24 hours of trading as the Bank of Canada is widely expected to lower the benchmark interest rate by 50bp to a record low of 1.00% as the world's eighth largest economy faces a recession for the first time in over a decade. A Bloomberg News survey shows that 19 of the 20 economists polled expect the BoC to lower the key rate by 50bp, and is anticipated to ease policy further over the coming months as growth prospects deteriorate at a record pace. As the U.S., who accounts for nearly 80% of Canadian exports, faces its longest recession in a quarter century, growth prospects for the export-driven economy is likely to weaken further as the trade conditions falter. Fading demands from the global economy lowered the trade balance to a 14-year low of 1.3B from a revised reading of 2.3B in October, and conditions are likely to get worse as business lower their outlook for growth. The BoC business survey for the fourth quarter showed 57% of the firms polled expect consumer spending to weaken further in 2009, while companies are planning to cut their workforce for the first time since record keeping began in 1998 as private spending falters. Retail sales fell 0.9% in October, which was driven by a 4.0% decline in gasoline receipts, and consumers are likely to to save rather then spending in the months ahead as the labor market deteriorates. The economy shed another 34.4K jobs in December after losing 70.6K jobs in the previous month, which raised the annual rate of unemployment to a three-year high of 6.6% from 6.3% in November. Fading employment opportunities paired with deteriorating fundamentals could lead the BoC to ease policy further over the coming months, and as investors raise bets for additional rate cuts by the central bank, the Canadian dollar is likely to face increased selling pressure over the near-term.

As investors expect the BoC to cut 50bp, trading the given event risk may not be as clear cut as some of our previous trades, but nevertheless, we would need a clear shift in policy to set the stage for a long Canadian dollar trade. Therefore, if policy makers decide to conclude their easing cycle backed by neutral commentary, and with our expectations at hand, we will look for a red, five-minute candle following the release to confirm a short trade on two lots of USDCAD. We will place our initial stop at the nearby swing low (or reasonable distance), and our first target will equal this risk. Our second target will be base on discretion, and in order to preserve our profits, we will move the stop to breakeven once the first trade reaches its target.

On the other hand, the BoC Governor Mark Carney and Co. are likely to continue their easing cycle as they face mounting growth concerns paired with financial uncertainties. As a result, a rate reduction of 50bp or more paired with dovish commentary would clearly favor a bearish outlook for the Canadian dollar, and we will follow the same setup for a long USDCAD trade as the short mentioned above, just in reverse.

DailyFX

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