Forex Trading Guide: BOC Interest Rate Decision

News traders, huddle up! If you’re looking for a top-tier event to play this week, we’ve got the Bank of Canada interest rate decision scheduled on Wednesday’s U.S. session. Here’s a simple trading guide on how to make pips from this announcement.

What is this event all about?

For the newbies just tuning in, lemme tell you that interest rate decisions or monetary policy statements are the red carpet events of the forex world. With interest rates and the level of money supply influencing the demand for and value of currencies, traders are always speculating about central bank action based on fundamental analysis in the same way movie buffs buzz about their Best Picture bets.

But even with all the economic odds pointing towards a particular monetary policy decision, policymakers can still make a few surprise decisions from time to time. Don’t forget that the BOC has actually shocked the markets last year with a couple of preemptive rate cuts aimed at shielding the Canadian economy from worse repercussions of the oil price slide.

What happened before?

In their more recent monetary policy announcements, BOC officials have refrained from making any major changes, keeping their benchmark rate steady at 0.50% since September last year. In fact, BOC head honcho Poloz seemed a tad more confident about Canada’s economic prospects in their past few rate statements, citing that the government’s new fiscal measures are likely to have a positive impact on overall growth.

USD/CAD 1-hour Forex Chart

USD/CAD 1-hour Forex Chart

Still, comparing USD/CAD’s reaction to the March and April BOC statements, during which policymakers decided to sit on their hands, indicates that forex junkies are starting to doubt that the central bank can keep policy unchanged for much longer. In March, USD/CAD dropped by nearly 200 pips right after the announcement while the pair made a slow climb during the April statement.

What’s expected this time?

If you’ve gotten a chance to read my Economic Snapshot on the Canadian economy, you’d recall that a bunch of the latest reports printed weaker than expected results, particularly when it comes to trade and consumer spending. Because of that, BOC officials might sound less upbeat this time around but the consensus is that they could still keep rates on hold.

Even so, the wildfires in energy-rich Alberta likely put a huge dent on production and business activity over the past few weeks, enough for market watchers to carry on speculating that the BOC would dole out stimulus sooner or later. Heck, some might be even convinced that a decision to stand pat now would simply increase the odds of an interest rate cut in the next BOC statement.

Because of that and the risk-off vibes in the market these days, the path of least resistance for the Loonie seems to be to the downside unless the BOC reiterates that government efforts will be enough to keep growth supported. In any case, be sure to make the proper adjustments to your Loonie positions to account for event risk!