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This is a reading source from Forex Factory which I think is pretty good to what’s going to happen later in a few hours time.

There are five big central bank meetings this week, starting with the most intensely debated and arguably the closest one from Canada. Apart from the monetary policy decision, which comes out later today at 1400 GMT, the BOC governor designate Mark Canary would speak tomorrow and the current governor David Dodge would speak on Thursday, before the Canadian employment report caps the week on Friday. As such, there is something to look forward to from Canada all through week.

The Bank meets 8 times during any year and this is its last meeting for the year 2007. So far during 2007, the BOC has increased rates once in July by 25 basis points to 4.50%. Importantly, this is the second last meeting for the current BOC Governor, David Dodge. The current consensus view is for no change in rates; however there are many big banks are calling for a cut in rates

Fundamental Outlook:

According to the GDP data released on Friday, the Canadian Economy grew by 2.9% in Q3, ahead of BOC’s projected level of 2.5%, and this is the most likely reason cited for the no change in rates. However, the Canadian Economy looks to be in trouble going into Q4, with exports being the most vulnerable. Further, there has been three back to back quarters of inventory accumulation, which means if the domestic demand slows, then there could be fears of a sharper than expected slowdown in Q4.

The Bank of Canada core inflation index for October was 1.8%, at its lowest since June 2006 and importantly below the mid of the BOC comfort zone for inflation of 1.0% and 3.0%.

Fundamentally, softer interest rate regime would be justified, as it would weaken the CAD, the rally in which has been the primary driver for the current slowdown, which is expected to deepen further to 1.8% (approx) in Q4. Further, the CPI figures are also well behaved currently, and lower interest rates would also ensure continued domestic demand to the current inventories. BOC could signal a rate cut in January-08, if they don’t cut interest rates this time itself.

Markets Expectation:

The Canadian bonds, tracking the US bonds, have had a sharp fall over the last few months, and currently the 2-Year yields are near 3.65%. The 10-Year bond yields are at 3.98%. The Bond charts are given below.

The short-term interest rate futures are currently discounting a no chance in rates at this meeting, however a cut is being expected at the next meeting on 22-Jan. As such, the most likely outcome of this meeting is a “Dovish”.

The BOC’s last statement on 16-Oct too was dovish, which was best highlighted by this line from their statement…. “All factors considered, the Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.”

CAD would weaken sharply if there is a cut in rates, as such a move is only half-baked into the prices. On the other hand, a no change in rates would produce a small pop, which could be sold into, depending on the dovishness of the statement. However, a very sharp fall or a rally too many not be expected in the USD-CAD, given that the event risks for USD and CAD later on in the week.

Technical View:

USD-CAD is in an uptrend currently, which is likely to continue further over the next few days, possibly towards 1.0200 over the next few days. A rally above that could see further strength in the pair. Importantly the strong Support for the pair would be at 0.9750, a break below which may not be seen over the next few days. The pair remains a “Buy Dips”, while above the latter.

Trade Wise, Trade Well!

Breaking the top looks fairly easier than falling down, but I’d be wary of the reversing MACD happening on both the short and long term charts. Just wait out for the news release and don’t open any positions prior the news.

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