BOC Instant Analysis A magician s disappearing doves

Kicking off the upcoming onslaught of central bank meetings, the Bank of Canada opted to leave interest rates unchanged at 0.50% today, as widely expected. […]

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By :  ,  Financial Analyst

Kicking off the upcoming onslaught of central bank meetings, the Bank of Canada opted to leave interest rates unchanged at 0.50% today, as widely expected. Some economists and traders were speculating that the central bank would surprise traders with another unanticipated cut, but the recent recovery in oil prices and solid economic data from the Great White North was enough to keep the BOC on hold.

Most importantly, the accompanying statement was more optimistic than expected, as if a magician had made the previous doves disappear. In the missive, the BOC noted that “The stimulative effects of previous monetary policy actions are working their way through the Canadian economy” and that “[m]ovements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy. In essence, the statement portrayed a central bank that was not particularly concerned with recent market developments and was instead content to let its recent actions run their course.

The BOC did raise a yellow flag about the world’s second largest economy, noting that “increasing uncertainty about growth prospects for China” raises questions about the pace of the global recovery. This comment serves as a reminder that all loonie (as well as aussie and kiwi) traders should keep an eye on economic data out of China, the marginal consumer of most of the world’s commodities.

Technical View: GBP/CAD

We covered USD/CAD in depth yesterday, so we’re focusing in on its more volatile cousin, GBP/CAD, today. After forming its own 4-month bullish channel, GBP/CAD stalled out against the 200% extension of its Q1 pullback at 2.0960 in late August. The pair put in large Evening Star candlestick formation off that level, showing a massive shift from buying to selling pressure, and proceeded to break below the established channel.

As of writing though, the secondary indicators are not necessarily painting a bearish picture over the medium-term. The MACD has flat-lined around the “0” level, showing essentially neutral momentum, while the RSI indicator has managed to stabilize at the “40” level, well above oversold territory. Moving forward, the key support zone to watch will be from the 38.2% Fibonacci retracement at 1.99 up to psychological support at 2.00; as long as the pair remains above that zone, the near-term bias will remain neutral. Conversely, a recovery back above 2.05 could open the door for another run toward 2.10, while a break below 1.99 would suggest that the recent rally is getting unwound for a move back down toward 1.95 or lower.

* An Evening Star candle formation is relatively rare candlestick formation created by a long bullish candle, followed a small-bodied candle near the top of the first candle, and completed by a long-bodied bearish candle. It represents a transition from bullish to bearish momentum and foreshadows more weakness to come.

GBPCADDAILY9-9-2015 10-20-52 AMSource: City Index

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