08 March, AtoZForex, London – Bank of Canada (BoC) is stuck in ‘wait and see’ mode and Bank of America Merrill Lynch (BoAML) expects the Canadian central bank to hold the overnight rate at 0.50% at today’s BoC meeting, reiterating that the economic growth outlook is roughly in line with its latest monetary policy report (MPR).
The most important growth consideration in the next couple of years is the Federal fiscal stimulus, which will only be unveiled at the 22nd of March budget date.
“Although we expect the BoC to upgrade its 2016-17 growth forecast in the April MPR on stronger government spending, it will be in wait-and-see mode at its meeting this week,” Bank of America noted.
Trading BoC meeting
The steady state outcome that the investment bank expects will likely elicit little market reaction with mere 1-2bp cut priced in the overnight index swap (OIS) market. However, the substantial repricing of BoC expectations since the end of January (see Chart 1) when the market expected a 100% interest rate cut through September 2016 relative to only 20% now has left asymmetric risks for the USDCAD, as CAD appreciated since January on the back of falling expectations of an interest rate cut by the BoC.
Nonetheless, “with USDCAD having overshot two-year rate differentials on the downside (see Chart 2), the market is likely to respond more significantly to any dovish leanings in the statement than the overall positive tone we anticipate,” BoAML added.
In addition, the over 9 percent appreciation of the CADUSD could raise concerns about an unwanted tightening of financial conditions, particularly as the Canadian central bank has yet to see strong evidence of a rebalancing toward non-energy exports.
Therefore, risk – reward favors long USDCAD positions into today’s BoC meeting. “While not our central case, a dovish tone will challenge the optimistic OIS path (more than a hawkish one), relative to the residual economic risks,” Bank of America Merrill Lynch noted.
Also see: 08 March Barclays Forex analysis
Technical USDCAD note
From technical perspective, we could expect a correction of the recent USDCAD downfall.
At the moment the pair has found a resistance at an alignment of a monthly upward sloping trend-line, Fibonacci 138.2% retracement level, and daily 200 SMA at 1.33, which could guide the pair higher to Fibonacci 150% retracement level at 1.35 and possible to Fibonacci 161.8% zone at 1.366 from where the down-move should resume, supported by rising Oil prices, as weekly MACD and RSI indicate bearish momentum.
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