This blog goes where few traders dare – the exciting world of Forex outside the dollar!

January 23rd, 2013 at 5:39 pm

Cautious BoC Sinks the Loonie.

The second central bank policy meeting of the week brought not surprises, but markets responded with force. The Bank of Canada left its benchmark rate at 1%, in line with expectations. However, follow up comments from the Governor Mark Carney certainly delivered a lot to the Canadian Dollar. He said that low inflation outlook does not warrant increase in rates and such action is “less imminent than previously anticipated”. This means that a hike will probably not happen for some time and the Loonie immediately lost ground, reaching parity with the USD.

In order to understand this reaction, we have to recall what happened in 2012. Starting early last year, the BoC was hinting withdrawing liquidity (raising rates) within few months. That created a high degree of expectation among market participants and was partly the reason for strong performance of the CAD – better interest rate differential versus other currencies became “priced in”. Of course, 2012 ended with no action and the first meeting of the New Year pushed this expectation even further down the line. In fact, analysts from commercial banks predict rate increase to be put off until 2014. All of a sudden, the Loonie is no longer as desirable, hence today’s weakness. That might change soon once cooler heads realize that other central banks are also in no hurry to tighten their respective policies. Alternatives for higher yielding currencies remain limited and that is not likely to change soon.

The meeting itself was of interest to me as I had couple of trades involving the Canadian Dollar. I will be the first to admit, though, the reaction surprised me. I did not expect much, in line with previous BoC meeting, thus decided not to interfere with trades. In case on the USD-CAD, I was looking for a breakout from a tight range. The first move was down, causing a loss of 27 pips. Soon after, the price moved through the buy level and quickly reached the target result of 35 pips. On a related matter, the parity level proved to be a robust support/resistance in the past and the same could happen now.

As mentioned yesterday, I focused on short-term trading of the EUR-JPY, but only in one direction – down. There were actually three trades, but the first one was very early in the day and is not included on this chart. In fact, all entries were on 1M chart, compressed here to 5M format in order to fit one graph. It was not pretty or smooth, but all of these trades were positive, producing roughly 20 pips each. I am still interested in trading all Yen pairs from the short perspective, since it is difficult to identify good set-ups on the typical 1H and 4H charts. They will come soon, but for now, I need to see more price history.

Mike K.

Tags: , , , , , , ,


RSS feed for comments on this post | TrackBack URI

  • Consultation Services.

    If you like this blog and want to learn more about Forex trading or have specific questions, we offer consultation services. For details please contact:
  • Enter your email address:

    Delivered by FeedBurner

  • Exotic currencies,

    blog directory

    Finance blogs

    Finance logo