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The Bank of Canada (BOC) is set to announce its interest rate decision tomorrow so I decided to come up with a forex trading guide for those who want to trade the news. But before we start figuring out how to play USD/CAD during and after the event, let’s take a quick walk down memory lane to recall what happened in the previous BOC rate statement and how the Loonie reacted.

What did the BOC say in their January statement?

Although the BOC kept their target rate at 1.00% as expected, traders were a bit surprised to hear downbeat remarks from BOC Governor Stephen Poloz. At that time, he pointed out that inflation has been much weaker than expected and that the annual CPI won’t reach the central bank’s 2% target until 2016.

In addition, policymakers expressed their concerns about the slowdown in the Canadian housing market. They also mentioned that trade and employment figures have been disappointing so far, reducing the likelihood of an interest rate hike in the foreseeable future.

How did USD/CAD react?

With a whopping 150-pip rally, that’s how! As you can see from the 1-hour chart below, the pair was stuck in tight consolidation around 1.1000 prior to the actual monetary policy announcement then it skyrocketed to the 1.1150 minor psychological level hours after the event.

January BOC rate decision: USD/CAD 1-hour Forex Chart
January BOC rate decision: USD/CAD 1-hour Forex Chart

What is expected for their March decision?

During the G20 Summit a few days back, Poloz remarked that inflation is starting to pick up in Canada, making the central bank “a little more comfortable” compared to their uneasy outlook earlier this year. Aside from keeping interest rates unchanged at 1.00% for the umpteenth time, BOC policymakers are expected to be a little less dovish with their economic assessment in their March statement.

Bear in mind that Canada also boasted of a 2.9% GDP growth figure for Q4 2013, higher than the previous 2.7% growth figure, despite printing a deeper monthly economic contraction for December. The upward pressure on black crack prices, sparked by the conflict in Ukraine and Russia’s threats to restrict oil supply, could keep the Loonie supported.

Tips and tricks

Judging by the small improvements in Canadian economic data, there could be a chance that the BOC would sound relatively hawkish once more. If that’s the case, USD/CAD could carry on with its drop, after a failed test of the 1.1200 major psychological resistance last month.

USD/CAD tends to consolidate hours before the actual event so it might also be a good idea to come up with a straddle setup if you don’t have a strong bias in either direction. If you’re a little more cautious, you can opt to wait for the release candle then ride the direction of the move until the next psychological level for a quick scalp trade.

Do you plan on trading this event? Don’t be shy to share your trade ideas right here!