Forex Trading Guide: BOC Interest Rate Decision

It’s time for another edition of my Forex Trading Guide! Who’s up to trade the Bank of Canada’s monetary policy statement? This event, which is scheduled for 2:00 pm GMT today, could have a say in both short-term and long-term currency price action of the Canadian dollar so y’all better keep close tabs on this one.

What is this economic event all about?

If you’ve graduated with flying colors from our School of Pipsology, you’d know that monetary policy is one of the biggest factors that influence the value of a currency. Interest rate expectations affect the demand for a currency as investors seek to profit from higher returns. In other words, the possibility of seeing tighter monetary policy or a rate hike from the BOC could result to Canadian dollar appreciation. On the other hand, expectations of easy BOC monetary policy or a rate cut could lead to a Loonie selloff.

What happened last time?

In their January rate statement, BOC policymakers decided to keep interest rates on hold at 1.00%. Governor Stephen Poloz mentioned that central bank officials are still concerned about weak inflation and a slowdown in exports, which was why they also decided to keep the door open for a rate cut later on.

You can just imagine the heartbreak for the Loonie then! Just take a look at this screenshot of USD/CAD forex price action during event. Ouch!

USD/CAD 1-hour Forex Chart

USD/CAD 1-hour Forex Chart

USD/CAD had been moving sideways peacefully prior to the event then BAM! Poloz says that the “door is slightly MORE open” for a rate cut. The Loonie sold off by roughly a couple hundred pips to the dollar right there and then.

What is expected this time?

A quarterly monetary policy decision usually means the following: a stronger price reaction from the local currency (compared to currencies with monthly central bank statements) and a significant amount of economic data released in between statements. The latter suggests that there’s a good chance the economic landscape might’ve drastically improved or worsened in between policy statements.

The latest set of data from Canada has been a mixed bag, with decent improvements in the jobs figures and a slight downturn in manufacturing. Hiring picked up by 42.9K in March after falling by 7.4K in February, effectively bring the jobless rate down to 6.9%. As shown by the Ivey PMI, the manufacturing industry has been expanding for the past three months but logged in slower growth in March. Inflation and retail sales have posted consecutive monthly gains, but building permits and housing starts have lagged behind.

How can I trade this event?

Ah, the million dollar question! While I wouldn’t rely solely on this report or my trading tips for a million dollars, you should definitely be on the lookout for opportunities to make profits off the BOC rate announcement.

A hawkish statement or at least a less dovish one compared to their previous policy statement could lend a bit of support to the Canadian dollar, as upbeat remarks could ease rate cut fears. On the flip side, another dovish statement from Poloz could push USD/CAD to test or even break its previous highs around 1.1275.

An actual rate cut isn’t expected this time though, but do keep your ears peeled for any currency jawboning. You see, Poloz has repeatedly talked about the negative impact of a strong currency on Canada’s export industry, as an appreciating Loonie makes their products more expensive in the international markets. I wouldn’t be surprised if he tries to talk down the Canadian dollar again!

If you’re not in the mood to trade the news, you can simply take note of what the BOC said and how the Loonie reacted. From there, you can figure out a longer-term directional play based on the BOC’s policy bias. I suggest you take a look at cross currency pairs like Cyclopip does and see if you can trade a currency pair with diverging monetary policy biases. Good luck and good trading!