Bank of Canada rate decision among handful of key events this week

The new week started slowly this morning as government bond selling took a breather. Consequently, stocks bounced back at the open which resulted in further weakness for perceived safe-haven gold and silver. However, at the time of this writing, equity indices in Europe were coming off their best levels. In FX markets, the dollar rose on Friday on the back of a stronger US employment report and the greenback was touch firmer at the start of this week. But with no significant change is the market’s view for interest rate changes in the US, the dollar may struggle to gain further momentum because sentiment is still pretty much bearish in the short-term outlook. Could Yellen’s testimony in mid-week or US data (CPI and retail sales) on Friday change that view? Wednesday is also a key day for the British pound and the Canadian dollar – because of the release of UK wages data and the Bank of Canada’s key rate decision.

Bank of Canada looks set to raise rates by 25 basis points

Officials at the Bank of Canada surprised the markets by delivering significantly hawkish remarks in recent weeks. As a result, speculation over a rate rise has risen sharply. Most analysts believe a 25 basis point increase will be announced this Wednesday, which would put the main overnight rate at 0.75% from its current level of 0.50 per cent. Is there still room for the Canadian dollar to gain, or is the move now priced in? That’s the key question and one way to look for answers is by studying the CAD’s price action around key technical levels. For example, if some key resistance level holds the USD/CAD down then we may see further strength for CAD ahead of Wednesday’s rate decision. However, if resistance levels on USD/CAD start to break down then this would point to profit-taking from the existing CAD long holders. Of course, how the CAD will behave on Wednesday is impossible to say at this stage but a rate rise should still support it, one would think.

CAD/JPY possibly better pair for CAD bulls than USD/CAD

But for us, the CAD/JPY may be a better pair to watch or potentially trade ahead of the BoC rate decision, than USD/CAD. With USD/CAD falling and USD/JPY rising, the CAD/JPY has had a stronger upward trend than the USD/CAD has had a downtrend. But this also makes the former a more overbought pair than the CAD/USD (USD/CAD inverted). Still, trends are more likely to carry on than reverse at any given moment in time. That being said, the nearest support level on CAD/JPY is somewhat far from where price is trading at the moment: at around 87.50, which was the last resistance level prior to the latest break higher. Given the strength of the current trend, price may struggle to pull back that far before potentially pushing higher. But the RSI has reached overbought levels. An alternative scenario may be this: the CAD/JPY breaks above the prior swing high at 88.90 area cleanly, then pulls back to re-test this level. If support here holds on the potential re-test then in this scenario we may see a continuation towards the 127.2% Fibonacci extension level next, at 91.20. Meanwhile all bets would be off if the 87.75 support level gives way and then 87.10 also breaks. This would technically end the short-term bullish bias as we will then have our first lower low. 

Source: eSignal and FOREX.com.