Looking Ahead to the Bank of Canada
Next Monday is a bank holiday for Canada but Wednesday brings the much-anticipated Bank of Canada decision on rates. The early expectatin that Canada would be the first of the G7 countries to raise rates has been – throughout summer – discounted to varying degrees. The Bank of Canada has had to rely on strong data to justify remaining hawkish. Today’s GDP release was just 0.1 better than expected but the loonie rally that followed put an exclamation point on what traders think the BOC will do Wednesday.
The USD/CAD has continued to sink and in great part due to the U.S. dollar weakness. The Fed promise of stimulus and the BOC’s hawkishness are keeping the USD/CAD in a downtrend. The only thing that is likely to derail this trend is a disappointing BOC where there is no rate hike (which despite being partially discounted will none-the-less initially cause some loonie weakness) but that could be tempered by a very clear and hawkish statement.
Past performance is not indicative of future results
The USD/CAD downtrend continues because of the opposing stances of the of the U.S. and Canadian central banks.
One of the concerns however is that despite a very weak U.S. Dollar Index – which broke lower through a daily bear flag before Bernanke’s Jackson Hole speech – the USD/CAD has been unable to break lower through recent support at 0.9841. This does reflect some hesitation on the part of loonie bulls to continue to strengthen the currency. This shows that there is some fear that the BOC will disappoint.
While there is a growing expectation of rates remaining at 1.0% the kind of loonie rally that today’s GDP created tells me there is still some hope of a hike.
The bias towards tightening remains but there is some concern it may not be as strong. Loonie bulls, be ready for a strong correction if the language of the statement is weak.
As an active forex trader and Chief Currency Analyst for InterbankFX.com I do write for a number of sites all over the web and I am happy to say that I will be posting updates at www.IBFXconnect.com. My Activity Board will feature the trades from my trading account as well as intraday commentary.
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