Trading Guide: May 2013 BOC Interest Rate Decision

Gather ’round, folks! The Bank of Canada interest rate statement could be one of our best opportunities to grab some pips this week so let’s figure out how to trade this event!
But before we get to that, let’s first review what happened during the previous rate statement. Back in April, the BOC kept interest rates unchanged as expected, but they also downgraded their growth forecasts for the year.

At that time, BOC Governor Mark Carney and his men didn’t seem too happy about the Loonie’s strength and its negative impact on Canadian exports. They also projected that it would take much longer for Canada to hit its inflation target of 2%.

For their May rate decision, the BOC is expected to keep rates steady once more. After all, it’s Carney’s last monetary statement as BOC Governor, as he is getting ready to take over the top spot in the Bank of England.

With that, market participants are likely to keep tabs on what incoming BOC Governor Stephen Poloz has to say. Word through the forex grapevine is that he is a dovish person and that he will probably stick with a wait-and-see approach.

Take note though that he used to be in charge of export finance, which means that he has a soft spot for Canadian exports and probably isn’t too happy about Loonie appreciation as well. In one of his recent testimonies, he emphasized that growth has been less robust than anticipated. “I think that we will have to stimulate the economy for a certain length of time,” he added.

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Clearly, we can see that USD/CAD is currently finding resistance around 1.0400. The question is, how much longer can it hold?

If you ask me, the BOC interest rate decision may prove to be the catalyst needed for the pair to break through 1.0400. Should we see any hint of dovishness from the accompanying statement, it could send USD/CAD soaring past the resistance level, and we may see the pair trend higher until it hits the former resistance area at 1.0650.

Alternatively, any lack of action from the BOC could mean to zero volatility on the pair, which will only tilt the odds in favor of 1.0400 holding.

If you like living on the edge and have the guts to try it out, you can also consider trying to fade any spike up to 1.0400, as price action has the tendency to shoot off in one direction before fading following the release of the BOC rate decision. The 1.0400 level could in fact the perfect spot to put a short entry! Just make sure to keep your risk in check as you don’t wanna get burned too badly should price continue to rise!