Bank of Canada interest rate decision; Likely to wait until end of Q2 2010

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Bank of Canada interest decision: March 2, 14:00GMT


EARLIER PLEDGE TO KEEP RATES ON HOLD UNTIL JULY MEETING


The Bank of Canada will announce its interest rate decision at 14:00GMT and is very likely to keep rates on hold at 0.25%, a record low and where they have been since April 2009. The central bank has reiterated that given a benign inflation outlook, the low level of rates will remain until after the end of the second quarter of 2010. In the monetary policy report released shortly after the January meeting, the central bank raised its growth outlook for 2.9% and 3.5% for 2010 and 2011 respectively, and that a return to full capacity is expected in the third quarter of 201..


RECENT ECONOMIC DATA SUPPORTS TIGHTENING IN 2ND HALF OF 2010

While inflation has not overshot the central bank's target (January's annualised rate was 1.9%), yesterday's release of the GDP showed an increase of 0.6% month-on-month and annualised pace of 5%, which beat economists' forecast, putting Canada's economic recovery on a good footing (the economy should also have gotten a boost from the Vancouver Winter Olympics) even though there is still 'considerable' excess of supply remaining.


CURRENCY OUTLOOK

The strength of the Canadian dollar especially since October 2009, when it rose to a 13-month high at 1.0206, has continued to act as a drag on economic activity in Canada (as stated in the January Monetary Policy Report) and the usd/cad has stayed locked inside a range of 1.0206-1.0869 for the last 4 & 1/2 months, the price pattern resembles a bearish (for the U.S. currency) triangle formation and a breakout on the downside would eventually target the parity level. On the upside, a weakening of the Canadian dollar would see usd/cad penetrate the 1.0869 level and head towards chart resistance at 1.1126.


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