Intraday Market Thoughts

Three BoC Scenarios

by Adam Button
Jan 19, 2016 23:55

USD/CAD rallied late to finish higher once again in a remarkable streak of 13 consecutive daily gains for the pair. That sets the stage for Wednesday's razor thin Bank of Canada decision. We take a closer look at three potential outcomes. The short GBPAUD trade was closed at 2.0435 for a 335-pip profit, leaving three trades in progress. The latest Premium Video, titled "After the 052008 Parallel" is now up on the Premium section. The Video Analysis for trades & charts has been  posted for Premium susbcribers below, titled "After the 052008 Parallel"

Three BoC Scenarios - Videosnapshot Jan19 (Chart 1)

At the start of the year, the BOC decision was thought to be a foregone conclusion. Poloz had been optimistic in his recent comments, suggesting that manufacturing and other non-commodity exports were beginning to pick up the economic slack from resources.

Resource prices have plummeted. Since the December 2 BOC meeting oil is down $13, or 32% and that's made tomorrow's BOC decision intriguing. The OIS forward market prices a 49.2% chance rates are left unchanged and a 50.8% chance of a cut.

Here are the three scenarios:

1) A cut

This is what Poloz should do. The drop in oil prices leaves Canada extremely vulnerable to a shock and if/when it hits, then it will be too late for the BOC to ride to the rescue.

The closest thing Poloz did to dropping a hint when he spoke on Jan 7 was not mentioning that the current policy stance is appropriate.

High Canadian housing prices are a reason not to lower interest rates but at this point, that battle is better left to government regulators. The damage might not be that great and the kneejerk may fizzle because it's likely to be accompanied by soothing words on the economy.

2) No move but signalling a cut

Most central banks like to drop hints before moves but Poloz works from a different playbook. Poloz's style is to project optimism until the news becomes overwhelming and then he reacts swiftly. At least that's what he did last year.

He could be worried that yet-another surprise cut would spark concern in the broader economy and undermine confidence. A sharp drop in USD/CAD on the 'no cut' headlines may be a buying opportunity because the promise of a cut is almost as good as the real thing.

3) No cut, no hint

With bets against the Canadian dollar soaring, this would spark a harsh retracement and that's what may cause some CAD buying in the leadup to the 1500 GMT decision.

The economic data in Canada has been solid, especially jobs numbers. Poloz has been a big believer in the power of the weak Canadian dollar and he may prefer to let that do his work while keeping some power dry. On a risk-reward basis, there's a case for selling USD/CAD now and trading the headlines on the decision.


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