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Bank of Canada Interest Rate Decision Preview

October 28, 2020 By Mircea Vasiu

The Bank of Canada (BOC) is expected to announce its interest rate decision today. Most likely, the bank will not announce anything significant today, but the markets are interested in the monetary policy report statement. 

This is a quarterly report that presents the bank’s projections for inflation and economic growth. In light of the COVID-19 pandemic, the market will have an interest in how the BOC will interpret the economic activity and, more importantly, how it will respond to upcoming challenges.

All Eyes on the USDCAD Pair

The Canadian Dollar (CAD) is one of the currencies strongly related to the price of oil. The positive correlation between the two was responsible for the USDCAD reaching 1.46 in March this year as the WTI oil price settled into negative territory.

From that moment on, as the oil market recovered, so did the CAD. For the Canadian economy, the price of oil is an important driver of growth. Higher oil prices generate a higher GDP due to the fact that Canada is a big exporter of oil products.

As the price of oil recovered to $40, so did the USDCAD – it eased from 1.46 to 1.30. Speaking of 1.30, this is a pivotal level to watch moving forward. As both the Fed in the United States and the Bank of Canada lowered the rates close to the zero boundary, the driver in the USDCAD pair remains the price of oil.

From a technical perspective, the move up to the 1.46 level and the quick retracement to 1.30 implies the possibility of a head and shoulders pattern. If that is the case, the 1.30 acts as a neckline. A break there opens the market’s interest for the measured move, seen much lower than 1.20.

However, those are medium to long-term scenarios. As we head into the US elections and with the Fed interest rate decision one day after the election day, the BOC is unlikely to signal anything today. However, it would not be the first time when the BOC takes the market by surprise.

The bank did not signal its intentions to move the rate below zero. Therefore, the most we can look for in terms of more easing would be an increase of the quantitative easing pace. In fact, a new study shows that quantitative easing is more effective than negative rates – and this is one reason why banks avoid lowering into negative territory.

All in all, expect increased CAD volatility at the time of today’s decision. And keep an eye on the 1.30 level for the days to come.