The Bank of Canada (BOC) has been going against the grain with its hawkish stance for a while now – that’s why market players have been tracking its movements so hotly as of late. It’s like a giraffe amongst sheep… or rather, a hawk amongst doves… you just can’t help but notice it!
While other central banks have been flapping their dovish feathers and thinking of ways to boost their economies with monetary easing, the BOC has actually been considering the withdrawal of stimulus.
And why not? If you’re as confident in your economy as the BOC is, it’s only natural to ease off the stimulus pedal.
Canada’s policymakers believe that domestic strength (especially in consumer spending and business investment) will help the economy overcome external threats from Europe and China to maintain a moderate pace of growth.
Mixed economic reports
The BOC has used upbeat Canadian data to defend its hawkish stance in the past. But lately, Canada’s economic data has been mixed, leading some to believe the BOC may drop talks of withdrawing stimulus.
On one hand, a wider-than-expected trade deficit and a surprise decline in retail sales were seen in June, followed by a horrific employment report in July. But on the other hand, GDP posted a stronger-than-expected growth of 0.2% in June (versus 0.1% forecasts) and the Ivey PMI surged to a 5-month high in July.
Market expectations
Overall, the BOC isn’t expected to make any changes to its overnight rate, which is currently set at 1.00%. As a matter of fact, 40 out of the 40 economists that Reuters surveyed think the BOC will keep rates untouched.
BOC Governor Mark Carney repeated talks of tightening policy as recently as August 22, suggesting the central bank will stay on the hawkish end of the spectrum.Like a broken record, he went on to say what the BOC had already said countless times before: if the economy keeps expanding at this pace, the central bank may need to take back some of the stimulus measures it put in place.
Trading the event
And now for the juicy part: How can we catch pips from the rate decision? Let’s review the past BOC rate decisions for June and July to see how USD/CAD reacted to the event:
Compared to the previous BOC decisions, bearish price action for both the June and July statement wasn’t as pronounced as before. What’s interesting to note though is that USD/CAD still has a tendency to fall right after the event.
Since the BOC is relatively one of the more hawkish central banks around lately, majority (5 out of the last 6, to be exact) of its rate decisions for the year were immediately followed by a USD/CAD selloff of roughly 50-pips, which lasted at least an hour after the release.
However, with USD/CAD trending lower for nearly a couple of months now, it seems that the pair is due for a quick correction. The BOC rate decision could serve as a catalyst for a pullback in case Governor Mark Carney retracts his upbeat statements and delivers a dovish one this time.
If you’re brave enough to play this economic release, bear in mind that trading the news isn’t for the faint of heart as it entails event risk. Make sure you set your stops right and manage your risk properly!
