BOC RATE DECISION COULD MEAN FIREWORKS FOR CANADIAN DOLLAR
The Canadian economy is quickly gaining momentum. The Great White North quietly emerged as the fastest-growing G7 nation in the first quarter amid broad-based gains in virtually every sector. Seven consecutive months of job creation have also fueled optimism that the Canadian economy has emerged from a soft patch triggered by a prolonged oil-price collapse.
Against this backdrop, the Bank of Canada (BOC) is expected to raise interest rates on Wednesday for the first time in nearly seven years. A series of hawkish comments from BOC policymakers has set the stage for liftoff.
At the same time, a rate hike is expected to pour cold water on record debt levels and deter unfit borrowers from purchasing a home.
By hiking rates, the BOC will be just the second central bank to begin normalizing monetary policy in the wake of the financial crisis. The US Federal Reserve kick started that process back in 2015.
The Canadian dollar, already near ten-month highs, is expected to surge in the days that follow any rate hike announcement.
In addition to the BOC, traders can expect a steady stream of economic data throughout the European session. Action begins at 08:30 GMT with a report on UK employment. The country’s claimant count change is forecast to rise by 10,000 in June. Unemployment is forecast to hold steady at 4.6% in the three months ended May.
Meanwhile, Eurozone industrial production is forecast to rise 1.1% in May, following a 0.5% increase the previous month. In annualized terms, this translates into a growth rate of 3.6%,
Monetary policy watchers will also be keeping tabs on Fed Chair Janet Yellen, who will be testifying before Congress on Wednesday. Yellen will also face the Senate Banking Committee on Thursday.
The Canadian dollar continues to trade near multi-month highs against the dollar, with the USD/CAD barely holding on to the 1.2900 handle. A BOC rate hike could swing the door wide open for the bears. The pair remains strongly correlated with oil, as the commodity-sensitive loonie continues to react to volatile swings in the price of crude.
The dollar ran into fresh volatility on Tuesday, sending the EUR/USD to fresh 2017 highs. The pair is fast approaching the 1.15 handle, having crossed the previous 2017 high of 1.1445. Immediate resistance is located the psychological 1.15 level. On the flip side, immediate support is located at the 10 July high of 1.1418.
Cable weakened on Tuesday, falling further below the 1.2900 handle. The pair may benefit over the short term from weakness in the dollar, but the long-term picture remains negative. At the time of writing, the GBP/USD is likely to run into major resistance at the 1.3050 level, which represents the high from mid-May.