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Canadian Dollar Interest Rate Decision

by Rafael Rosa on July 19, 2010

kudlow Canadian Dollar Interest Rate DecisionThe decision day for the Canadian Dollar is almost here. On Tuesday (UPDATE: 9:00 AM Eastern time), the Bank of Canada will release its interest rate decision. The consensus is that the BoC will increase its key interest rate for the second consecutive time from 0.50% to 0.75%.  The historical rates can been seen in the graph below:

ir boc rates Canadian Dollar Interest Rate DecisionClick on image for full-size

Last week, we looked at some possible ass-kicking trades in the Canadian Dollar. On the USD/CAD daily chart, two possible head and shoulder formations were spotted (one regular and one inverted). As the graph below shows, the pair was not able to break below the 100 daily SMA, creating a rebound that has put the pair near the neckline of the inverted H&S formation. FX strategist Ashraf Laidi (Twitter: @alaidi) stated that crude oil’s failure to break above its 200 daily SMA helped keep the Canadian dollar from appreciating.

breakout usdcad thumb Canadian Dollar Interest Rate Decision

Click on image for full-size

If the BoC fails to increase interest rates, the Loonie will instantly lose some ground. Depending on the statement, a temporary long position on the USD/CAD could be desirable; however, shorting on the top of the range (Neckline or May 25 high) probably has the better risk-reward as the tightening cycle by the BoC would be likely to continue soon assuming global markets do not break down.

Nevertheless, while the USD/CAD is cool and all, the Canadian cross of choice to play the BoC interest rate is the GBP/CAD. The Pound enjoyed a nice rally with the Euro against the US dollar and other currencies, but it seems like it has lost some steam. This weakness in the GBP/USD bodes well for the GBP/CAD cross, especially if the BoC interest rate hike occurs.

The GBP/CAD has hit some key resistance during a very pivotal point for the Canadian dollar. As the interest rate decision time looms closer, the pair has stalled at the 200 daily SMA and appears to be forming a double top. CitiFx has also noticed this price action and issued a sell recommendation at 1.6041 today (Monday). As the graph below shows, a pretty bad statement and decision on the part of the Bank of Canada would be necessary to make this pair break out higher. I’ve been short the pair since Monday with the expectation of a rate hike and a positive statement. Targets include the 21 daily SMA (1.5815) and 55 & 100 daily SMAs (1.5450). Stop-loss orders reside above the 200 daily SMA.

gbpcd big view thumb Canadian Dollar Interest Rate Decision

When considering the last swing low & high, fibonacci retracements also point to similar support levels where taking profits would be recommended.

gbpcad fibs thumb Canadian Dollar Interest Rate Decision

In general, the Pound Sterling does not have many factors aiding it’s appreciation, except for positive expectations revolving around ‘austerity’ measures. The Canadian Dollar, on the other hand, has a strong economy with solvent banks and low debt levels. It also has an interest rate cycle ahead of itself. Even if the interest rate decision on Tuesday creates some negative action now, short positions should be considered on future rallies.

Until the USD/CAD reaches the parity zone, the Canadian dollar probably has some room to run. Stay safe.

Comments encouraged.

Technorati Tags: Bank of canada, boc decision, canadian dollar, Currency Trading, day trading, fx trading, GBP/CAD, interest rate decision, interest rate hike, loonie, pound sterling, us dollar, usd/cad

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