Trading the Bank of Canada Interest Rate Decision

(eToro Blog) The Bank of Canada is expected to announce its interest rate decision on Tuesday January 17^th at 2pm London time. The BOC is expected to keep rates on hold at 1%. At its last policy meeting, BOC Governor Mark Carney was concerned about the situation in Europe and its impact on financial markets. Carney balanced the European concerns with strong growth experienced in Canada in the second half of the year. Inflation was slightly higher than BOC’s projections but the bank expects inflation to fall below 2% as food and energy prices fall on reduced demand due to the global economic crisis.

With the drastic deterioration of the situation in Europe, there is high likelihood of the BOC to be dovish and take preemptive measures in an effort to protect the Canadian economy. The Canadian economy is very similar to the Australian economy, as both of these countries are reliant on global demand for its commodities. Australia has recently cut rates twice by 25 basis points and economists predict other commodity economies such as Canada to follow suit.

Recent Canadian economic developments to take in consideration:

Canada reported that its unemployment rate rose to 7.5% in December. Building permits dropped in November by 3.6%. The annual inflation stands at 2.9%. The GDP growth was flat in the month of October. The trade balance report in November showed surplus of $1.1 billion from a deficit of $487 million in October. Exports rose as energy prices rose higher in the latter half of 2011.

Market reaction to last month’s interest rate decision:

The USDCAD dropped 60 pips immediately after the rate decision as a neutral policy by the BOC was considered bullish for the Canadian Dollar.

Scenario A: BOC keeps rates at 1% and maintains neutral monetary policy

If the BOC adopts a similar neutral policy like previous meeting, we expect the USDCAD to fall 50 pips or so after the rate decision.

Scenario B: BOC keeps rates at 1% and adopts dovish outlook

In this scenario, the BOC would switch to a dovish stance and focus on the employment situation at home. We might see the USDCAD rising 50 pips after the announcement.

Scenario C: BOC cuts rates by 0.25%

If the BOC decides to follow the Reserve Bank of Australia and cut rates by 25 basis points, we might see the USDCAD rising 100 pips.

OpenBook:

Traders on OpenBook are primarily long on USDCAD with approximately 53% of all positions on the long side. The longs have their limits around 1.0260 and stops around 1.0090.