EURCAD: Trading The Bank Of Canada Interest Rate Decision

By David Song, Currency AnalystMichael Boutros, Currency Strategist

Trading the News: Bank of Canada Interest Rate Decision

What’s Expected:

Time of release: 0 4 /17/2012 1 3 :00 GMT, 9:00EST

Primary Pair Impact: USDCAD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%

Why Is This Event Important:

Although the Bank of Canada is widely expected to keep the benchmark interest rate at 1.00% in April, the fresh batch of commentary coming out of the central bank may prop up the Canadian dollar should Governor Mark Carney continue to strike an improved outlook for the region. As the recovery gathers pace, we may see the central bank head continue to soften his dovish tone for monetary policy, but concerns surrounding the record-rise in household debt may lead Mr. Carney to preserve a balanced tone for the economy as the marked appreciation in the local currency continues to dampen the fundamental outlook for the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Business Outlook Future Sales (1Q)

--

35.00

Net Change in Employment (MAR)

10.5K

82.3K

Consumer Price Index Core (YoY) (FEB)

2.2%

2.3%

The Downside

Release

Expected

Actual

International Merchandise Trade (FEB)

2.05B

1.07B

Ivey Purchasing Manager Index s.a. (MAR)

65.5

63.5

Retail Sales (MoM) (JAN)

1.8%

0.5%

The jump in business sentiment paired with the stickiness in price growth may encourage the BoC to raise its fundamental assessment for the region, and a less dovish policy statement may lead the EURCAD to retrace the decline from earlier this month as it raises the scope for a rate hike. However, the slowdown in private sector consumption along with weakening trade conditions may push the central bank to retain a wait-and-see approach throughout 2012, and we may see the BoC keep rates on hold for a prolonged period of time as policy makers continue to see potential headwinds for the economy. In turn, we may see the short-term rebound in the EURCAD gather pace over the next 24-hours of trading, and the pair finally break and close above the 100-Day SMA (1.3215) should Governor Carney curb speculation for higher borrowing costs.

Potential Price Targets For The Rate Decision

A look at the encompassing structure sees theEURCAD reversing sharply after briefly breaking below the 23.6%Fibonacci extension taken from the September 19th and January 17thtroughs at 1.3050. As noted in last week’s EURCAD Scalp Report , the pair continues to trade within the confines of a wedgeformation dating back to the start of the year with initial dailyresistance seen at the 50-day moving average at 1.3150 backedclosely by the 38.2% extension at 1.3165. Our medium-term outlookon the pair remains weighted to the topside with only a break belowtrendline support dating back to the January low negating ourdirectional bias.

Our 30min scalp chart shows the pair surging inNorth American trade before encountering resistance at 1.3140. Itseems as though the correction off the channel break seen last weekmay be complete with a breach above last week’s highs justabove the 50% e xtension taken from the March 14th and April5th troughs at 1.3165 eying subsequent topside targets at 1.3190,the 61.8% extension at 1.3216, and 1.3250. Interim support nowrests with the 38.2% extension at 1.3113 backed by 1.3080 and the23.6% extension at 1.3050. Should the data prompt a bullish loonieresponse, look to target downside levels with a break below themonthly low at 1.2945 putting a bearish tone on thepair.

How To Trade This Event Risk

Beyond the rate decision, we will be keeping a close eye on the policy statement as it promises to spur volatility in the exchangerate, and we may see the Canadian dollar snap back against the Euro should the BoCcontinue to strike an improved outlook for the region. Therefore,if we see the central bank soften its dovish tone for monetarypolicy, we will need a red, five-minute candle following therelease to establish a sell entry on two-lots of EURCAD. Once theseconditions are met, we will set the initial stop at the nearbyswing high or a reasonable distance from the entry, and this riskwill generate our first objective. The second target will be basedon discretion, and we will move the stop on the second lot tobreakeven once the first trade reaches its mark in an effort tolock-in our profits.

In contrast, the ongoing slack in the real economy paired with the slowdown in global trade may encourage the BoC to retain a wait-and-see approach throughout 2012, and we may see Governor Carney talk down speculation for higher borrowing costs as the region in an effort to stimulate a stronger recovery. As a result, if the central bank head maintains a cautious tone, we will carry out the same strategy for a long euro-loonie trade as the short position mentioned 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 2012

3/08/2011 14:00 GMT

1.00%

1.00%

-31

-46

March 2012 Bank of Canada Interest Rate Decision

Although the Bank of Canada kept the benchmark interest rate at 1.00%, central bank Governor Mark Carney held an improved outlook for the region, stating that the ‘r ecent developments suggest that the outlook for the Canadian economy is marginally improved .’ As the BoC softened its dovish tone for monetary policy, the EURCAD quickly slipped back below 1.3150, and the Canadian dollar held its ground throughout the North American trade as the pair ended the day at 1.3140.

--- Written by David Song, Currency Analyst andMichael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

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View the Expo Presentation on ‘Trading theNews’ For Additional Resources
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2012/04/17/EURCAD_Trading_the_Bank_of_Canada_Interest_Rate_Decision.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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