Monday, 20 April 2009 11:06:59 GMT
Written by David Song, Currency Analyst
Full Article
High uncertainty surrounding the Bank of Canada’s interest rate decision is likely to spark volatility across the foreign exchange market, and the central bank may continue to take unprecedented steps to stimulate the ailing economy as the U.S., the nation’s biggest trading partner, faces its worst economic downturn in over half a century.
Trading the News: Bank of Canada Rate Decision
What’s Expected
Time of release: 04/21/2009 13:00 GMT, 09:00 EST
Primary Pair Impact: USDCAD
Expected: 0.50%
Previous: 0.50%
Impact the Bank of Canada Rate Decision on USDCAD over the last 2 quarters
March 2009 Bank of Canada Rate Decision
BoC Governor Mark Carney and Co. cut borrowing costs by another 50bp to a record-low of 0.50%, and is likely to take further steps to stimulate the ailing economy as the region faces a deepening downturn. Mr. Carney dropped his reluctance to utilize policy tools beyond the interest rate, stating that the central bank would ‘provide additional monetary stimulus, if required, through credit and quantitative easing,’ and went onto say that ‘the target for the overnight rate can be expected to remain at this level or lower’ as growth and inflation falter. As a result, policymakers noted that the downturn in the global economy may keep price pressures below the 2% until the first half of 2011, and market participants speculate that the central bank will take further steps to expand the money supply as the benchmark interest rate falls close to zero.
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.
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:
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell 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 bearish bias on USDCAD ahead of the data release.
How To Trade This Event Risk
High uncertainty surrounding the Bank of Canada’s interest rate decision is likely to spark volatility across the foreign exchange market, and the central bank may continue to take unprecedented steps to stimulate the ailing economy as the U.S., the nation’s biggest trading partner, faces its worst economic downturn in over half a century. A Bloomberg News survey shows that 13 of the 25 economists polled expect the BoC to hold the benchmark interest rate steady at the record-low of 0.50% while the remaining number of participants forecast the central bank to lower borrowing costs by another 25bp to 0.25%, which would be the lowest since the central bank was established in 1934, and at the same time, Credit Sussie overnight index swaps are showing that investors are pricing a 50% chance for a 25bp rate cut as the outlook for growth and inflation falter. As the world’s eighth largest economy faces a recession for the first time in over a decade, while the central bank expects price growth to fall below zero for two quarters this year, policymakers are anticipated to utilize tools beyond the interest rate to manage monetary policy as the key rate falls close to zero. Meanwhile, BoC Governor Mark Carney said that even though ‘the Bank retains a considerable number of policy options…outlining a framework does not necessarily imply that these policy options will be deployed’ during a speech earlier this month, and went onto say that the extraordinary efforts taken on by policymakers should help to revive economic activity later this year, which suggests that the central bank may adopt a neutral policy stance going forward as Mr. Carney expects the annual rate of growth to increase 3.8% in 2010. Nevertheless, as the unemployment rate holds at a seven-year high of 8.0% while business spending contracts for the fifth consecutive month in March, deteriorating fundamentals are likely to weigh on the outlook for growth and inflation, and as the leading indicator foreshadows a deepening downturn in the region, economic activity is likely to weaken further as trade conditions falter. A report by the U.S. Commerce Department showed that private-sector spending in the world’s largest economy unexpectedly fell in March as households continue to face a weakening labor market, while a separate report by the agency showed that the trade deficit narrowed to a nine-year low of $26.0B from a revised reading of $36.2B in January as imports tumbled lower for the seventh consecutive month in February. As a result, Governor Carney is expected to take further steps to shore up the economy, which is likely to weigh on the exchange rate however, if the BoC keeps rates on hold and provides an improved outlook for growth and inflation, long-term expectations for higher interest rates paired with a rise in market sentiment could raise the appeal of the Canadian dollar as risk trends continue to dictate price action in the forex market
Trading the given event risk may not be as clear cut as some of our other trades but nevertheless, as economists expect the BoC to hold the benchmark interest at a record-low, we will favor a bullish outlook for the loonie if the central bank dissents on expanding its tools beyond the interest rate and adopts a neutral policy stance over the near-term. Therefore, with our expectations at hand, we will look for a red, five-minute candle following the rate decision to confirm a sell entry on two-lots of USD/CAD, and 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 an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, as households and businesses face a deepening downturn paired with weakening outlook for growth and inflation, Governor Mark Carney may lower borrowing costs further and take additional measures to stimulate the ailing economy by expanding the money supply. As a result, if the BoC cuts by another 25bp and adopts quantitative easing in an effort to stem the downside risks for growth and inflation, we will look to sell the Canadian dollar, and will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
Written by David Song, Currency Analyst
Full Article
High uncertainty surrounding the Bank of Canada’s interest rate decision is likely to spark volatility across the foreign exchange market, and the central bank may continue to take unprecedented steps to stimulate the ailing economy as the U.S., the nation’s biggest trading partner, faces its worst economic downturn in over half a century.
Trading the News: Bank of Canada Rate Decision
What’s Expected
Time of release: 04/21/2009 13:00 GMT, 09:00 EST
Primary Pair Impact: USDCAD
Expected: 0.50%
Previous: 0.50%
Impact the Bank of Canada Rate Decision on USDCAD over the last 2 quarters
March 2009 Bank of Canada Rate Decision
BoC Governor Mark Carney and Co. cut borrowing costs by another 50bp to a record-low of 0.50%, and is likely to take further steps to stimulate the ailing economy as the region faces a deepening downturn. Mr. Carney dropped his reluctance to utilize policy tools beyond the interest rate, stating that the central bank would ‘provide additional monetary stimulus, if required, through credit and quantitative easing,’ and went onto say that ‘the target for the overnight rate can be expected to remain at this level or lower’ as growth and inflation falter. As a result, policymakers noted that the downturn in the global economy may keep price pressures below the 2% until the first half of 2011, and market participants speculate that the central bank will take further steps to expand the money supply as the benchmark interest rate falls close to zero.
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.
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:
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell 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 bearish bias on USDCAD ahead of the data release.
How To Trade This Event Risk
High uncertainty surrounding the Bank of Canada’s interest rate decision is likely to spark volatility across the foreign exchange market, and the central bank may continue to take unprecedented steps to stimulate the ailing economy as the U.S., the nation’s biggest trading partner, faces its worst economic downturn in over half a century. A Bloomberg News survey shows that 13 of the 25 economists polled expect the BoC to hold the benchmark interest rate steady at the record-low of 0.50% while the remaining number of participants forecast the central bank to lower borrowing costs by another 25bp to 0.25%, which would be the lowest since the central bank was established in 1934, and at the same time, Credit Sussie overnight index swaps are showing that investors are pricing a 50% chance for a 25bp rate cut as the outlook for growth and inflation falter. As the world’s eighth largest economy faces a recession for the first time in over a decade, while the central bank expects price growth to fall below zero for two quarters this year, policymakers are anticipated to utilize tools beyond the interest rate to manage monetary policy as the key rate falls close to zero. Meanwhile, BoC Governor Mark Carney said that even though ‘the Bank retains a considerable number of policy options…outlining a framework does not necessarily imply that these policy options will be deployed’ during a speech earlier this month, and went onto say that the extraordinary efforts taken on by policymakers should help to revive economic activity later this year, which suggests that the central bank may adopt a neutral policy stance going forward as Mr. Carney expects the annual rate of growth to increase 3.8% in 2010. Nevertheless, as the unemployment rate holds at a seven-year high of 8.0% while business spending contracts for the fifth consecutive month in March, deteriorating fundamentals are likely to weigh on the outlook for growth and inflation, and as the leading indicator foreshadows a deepening downturn in the region, economic activity is likely to weaken further as trade conditions falter. A report by the U.S. Commerce Department showed that private-sector spending in the world’s largest economy unexpectedly fell in March as households continue to face a weakening labor market, while a separate report by the agency showed that the trade deficit narrowed to a nine-year low of $26.0B from a revised reading of $36.2B in January as imports tumbled lower for the seventh consecutive month in February. As a result, Governor Carney is expected to take further steps to shore up the economy, which is likely to weigh on the exchange rate however, if the BoC keeps rates on hold and provides an improved outlook for growth and inflation, long-term expectations for higher interest rates paired with a rise in market sentiment could raise the appeal of the Canadian dollar as risk trends continue to dictate price action in the forex market
Trading the given event risk may not be as clear cut as some of our other trades but nevertheless, as economists expect the BoC to hold the benchmark interest at a record-low, we will favor a bullish outlook for the loonie if the central bank dissents on expanding its tools beyond the interest rate and adopts a neutral policy stance over the near-term. Therefore, with our expectations at hand, we will look for a red, five-minute candle following the rate decision to confirm a sell entry on two-lots of USD/CAD, and 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 an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, as households and businesses face a deepening downturn paired with weakening outlook for growth and inflation, Governor Mark Carney may lower borrowing costs further and take additional measures to stimulate the ailing economy by expanding the money supply. As a result, if the BoC cuts by another 25bp and adopts quantitative easing in an effort to stem the downside risks for growth and inflation, we will look to sell the Canadian dollar, and will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.