Expectations for a 50bp rate cut by the Bank of Canada is likely to weigh on the exchange rate over the next 24 hours of trading, and as the region is expected to face a deepening economic downturn throughout the first half of the year, policy makers are likely to hold borrowing costs at the lowest level since the central bank was established in1934 in an effort to steer the economy out of a recession.
Trading the News: Bank of Canada Rate Decision
What’s Expected
Time of release: 03/03/2009 14:00 GMT, 09:00 EST
Primary Pair Impact : USDCAD
Expected: 0.50%
Previous: 1.00%
Impact the Bank of Canada Rate Decision on USDCAD over the last 2 quarters
January 2009 Bank of Canada Rate Decision
| The Bank of Canada lowered the benchmark interest rate by 50bp to 1.00%, which is the lowest level since the central bank was established in 1934, in an effort to steer the economy out of a deepening downturn. BoC Governor Mark Carney lowered his growth forecasts for the year, stating that he expects the annual rate of growth to contract 1.2% in 2009 after projecting a 0.6% expansion in October, and went onto say that policy makers will keep a watchful eye on ‘financial and economic developments in judging to what extend further monetary stimulus will be required.’ As the world’s eighth largest economy faces its first recession since 1992, the commentary from the central bank head suggests that the BoC will use all of its available tools to stimulate the ailing economy, and is likely to cut rates further as the global banking sector remains under pressure. | |
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. | |
What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
| Bullish Scenario:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release. | Bearish Scenario: |
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Expectations for a 50bp rate cut by the Bank of Canada is likely to weigh on the exchange rate over the next 24 hours of trading, and as the region is expected to face a deepening economic downturn throughout the first half of the year, policy makers are likely to hold borrowing costs at the lowest level since the central bank was established in1934 in an effort to steer the economy out of a recession. A Bloomberg New survey shows that 15 of the 23 economists polled forecast the BoC to lower borrowing costs to 0.50% as the GDP report for the world’s eighth largest economy showed that the annual rate of growth contracted 3.4% after expanding 0.9% in the third quarter, which was the biggest drop since 1991, and conditions are likely to get worse as trade conditions falter. A report by Statistics Canada showed that the nation posted its first trade deficit since 1976 as exports plunged 9.7% in December, which was the largest drop in foreign demands since 1982, and firms are likely to slash production and employment this year as the International Monetary Fund forecasts a global recession for 2009. Meanwhile, the labor report by the group showed that the economy lost 129.0K jobs in January, which was the largest drop in employment since comparable records began in 1976, and raised the annual rate of unemployment to a four-year high of 7.2% from 6.6% in December. Moreover, private-sector spending within the region fell 5.4% from November, marking its biggest contraction since 1991, and as households face a weakening labor market paired with financial uncertainties, fading demands from home and abroad are likely to drag on growth going forward. As a result, the BoC is likely to implement unconventional measures, such as quantitative easing, as they lower borrowing rates close to zero, and is likely to push for further fiscal stimulus objectives in order to stimulate the ailing economy. Nevertheless, as market participants speculate that BoC Governor Mark Carney and Co. will conclude its easing cycle this month, the Canadian dollar’s appeal may be attractive for some investors however, as risk aversion remains a dominant theme across the financial spectrum, the loonie could weaken further against the greenback as the reserve currency continues to benefit from safe-haven flows.
Trading the given event risk clearly favors a bearish outlook for the Canadian dollar however, if Governor Carney lowers the benchmark interest less than 50bp and continues to back expectations for an economic recovery in the third quarter, we will look for a red, five-minute candle following the rate decision to confirm a sell entry on two-lots of USDCAD. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
Conversely, deteriorating fundamentals paired with turmoil in the banking sector may lead the BoC to take an aggressive step to shore up the economy, which could lead the central bank to surprise the markets with a larger-than-expected rate cut. As a result, if policy makers decide to lower borrowing costs by 50bp or more and signals that the economic downturn will last throughout the year, we will look to sell the Canadian dollar, and will follow the same setup for a long USDCAD trade as the short position mentioned above, just in reverse.
