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If you’re hoping to trade the news during this shortened trading week, then you gotta gear up for the Bank of Canada’s monetary policy statement on Wednesday 3:00 pm GMT since this might just be the biggest event on the forex schedule.  Let’s go through our usual Trading Guide routine, shall we?

Why is this economic event important?

Monetary policy statements and interest rate expectations are the bread and butter of forex price action, as these influence demand for a currency.

Rate hike speculations, spurred by hawkish central bank biases and improving economic performance, typically lead to currency appreciation as investors seek higher returns. On the other hand, rate cut expectations usually spark currency depreciation.

Now the BOC is one of those major central banks that are stuck in the gray area right in the middle of the interest rate hike-cut spectrum. After all, the Canadian economy ain’t really printing dismal figures like most of its peers but it hasn’t shown signs of a strong recovery either.

Because of that, forex traders are sitting on the edge of their seats ahead of the rate statement, eager to find out if the BOC is starting to lean towards any particular monetary policy direction.

What happened before?

The previous BOC statement turned out to be a slightly hawkish one, as policymakers announced upgrades to their growth and inflation forecasts for the rest of the year.

Their official press release also indicated that the impact of the oil industry slump would probably be front-loaded, which means that they are expecting bleak data for Q1 but that a rebound is likely to take place later on.

Loonie traders’ ears seemed to perk up upon hearing that the BOC is predicting brighter days ahead for Canada, confirming that further rate cuts are unlikely. Heck, the Canadian dollar managed to advance by more than 600 pips against the U.S. dollar days after the upbeat BOC statement!

USD/CAD 4-hour Forex Chart
USD/CAD 4-hour Forex Chart

Of course, this tumble was also partly caused by broad-based U.S. dollar weakness then, thanks to a cautious FOMC statement and lower odds of a Fed rate hike for June. See what I mean about interest rate expectations driving forex price action?

What might happen this time?

BOC Governor Poloz and his gang of policymakers are expected to keep interest rates on hold at 0.75% again, as they have noted that they’re no longer looking to ease monetary policy for the time being.

Central bank officials have been patting themselves on the back for deciding to announce a surprise rate cut earlier this year, citing that this cushioned the blow of the oil price slide on the Canadian economy.

Economic data has been somewhat improving since their April policy statement, underscoring the BOC’s view that an export-led recovery is underway.

The latest trade figures revealed that export volumes actually jumped by 1.9% in March, although the monetary value of their shipments saw only a 0.4% gain due to falling commodity prices then.

In addition, as I’ve mentioned in my Monthly Economic Review for Canada, the economy saw underlying strength in its employment data while consumer spending stayed robust.

Inflation was slightly weaker in April though, with the core CPI showing a mere 0.1% uptick and the headline CPI chalking up a worse-than-expected 0.1% decline.

If this is enough to get BOC policymakers shaking their heads, Governor Poloz might start emphasizing how a weaker Loonie might be more beneficial for price levels and trade activity.

How might USD/CAD react?

Hawkish remarks from BOC officials could restore demand for the Canadian dollar, which has been steadily sliding against the Greenback since the middle of this month.

Strong emphasis on a potential recovery and the ongoing export-driven rebound could also allow the Loonie to erase its recent losses.

On the flip side, cautious remarks from BOC Governor Poloz could lead forex traders to speculate that another interest rate cut might still be possible.

Bear in mind that Canada’s commodity-driven buddies Australia and New Zealand currently have dovish central banks, as weak inflation and employment figures warranted more stimulus.

In addition, any attempts to jawbone the currency might also keep any gains in check.

How do you think the BOC statement will turn out? Don’t be shy to share your thoughts in our comments section below!