Financial Trading Blog

BOC Interest Rate decision



The Bank of Canada is widely expected to raise rates by another 50bps, with talk of even
75bps. A hawkish BOC could put more pressure on a weak USD/CAD exchange rate.
----------------
Canada's special position
The BOC is facing a similar inflation situation to the Fed, which is why an aggressive tightening
schedule is pretty much priced in by the markets.
But Canada has some unique characteristics that make planning the BOC's future moves a little
more complicated. One of them is the importance of oil in the economy and the other is oil’s
effect on the value of the currency. While higher crude raises inflation, it also supports the
commodity export-orientated Canadian economy.
Unlike the United States, Canada's Q1 GDP is expected to be above government and central
bank expectations around +5.5%. With inflation near 7.0%, the BOC has more than enough
room to tighten policy and get inflation back under control.
It's not that simple
The problem is that tighter policy would likely translate into a stronger Loonie and contribute to
lower inflation. But that would also make it harder for exporters. With the economy getting an
extraordinary push thanks to unusually high oil prices, the BOC can't necessarily bet on high
crude prices to cushion harsh monetary policy.
That might have been one of the reasons why Governor Macklem ruled out a 75bps rate hike
during testimony in Parliament. Consumer confidence is on the backfoot, and household debt
rising. Still, the BOC has argued that consumer demand remains excessive, and promised to
bring rates into "neutral" as fast as possible. Meaning focus will be on the statement to see if
Macklem delivers on the expectation that another aggressive hike will be necessary at the next
meeting.
Loonie below 200 SMA
USD/CAD has reversed course following a false break above $1.30 on May 12 and hasn’t
looked back since. Yesterday, the pair gapped below trendline T1, confirming a break of the 50-
day average and it now trades below its 200-day. If prices remain below $1.2670 for more than
three sessions, we may enter bear market soon as this would be a confirmed breakout.
Major support lies at the $1.2288 low of last October. In the interim, the swing lows of $1.2400
and $1.2450 can act as mid-term supports. But a bounce could also happen at the T2 dynamic
trendline near $1.2500.
Inversely, if Loonie reverses back above the 200-day and the T1 trendline, filling the gap would
be very likely. Above there, $1.2885 makes interim resistance before an attempt at $1.3000.
loonie-boc

Key takeaways


The BOC has more flexibility in controlling inflation than the Fed as its economy relies on oil.
Gov Macklem doesn't want to raise rates aggressively because it would be bad for exporters,
and that’s why USD/CAD traders must demystify how big the next rate hike will likely be.

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