On Wednesday the Bank of Canada meets for their interest rate decision. Key points from the last BOC meeting on 12 April 2017 as per the statement.

When the BOC met last the Canadian economy had reported some positive data in the health of the consumer (retail sales and core retail sales), the labor market (with a focus on employment growth), the housing market and GDP.

The Governing Council’s discussions focused on three main issues;
> If positive data was signaling stronger economic momentum for Canada
> How heightened levels of uncertainty regarding US tax and trade policies should be incorporated into the outlook
> How much excess capacity the economy has and the growth rate of potential output going forward

The Governing Council, while happy with the positive data, felt that the improvement in data had come from factors that would not be sustainable. One of these factors being a more stable oil price. The Governing Council also mentioned that uncertainty regarding US tax and trade policies are hampering exports and business investment and while difficult to model the outlook is negative for the Canadian economy. As far as the third point is concerned, the Governing Council see core inflation in a down trend and view excess capacity as being greater than the midpoint of the range of estimates while potential output growth is expected to increase though less than forecast in April 2016. Financial conditions are supportive of growth though less stimulative than forecast in April 2016. The BOC maintained the target for the overnight rate at ½ per cent. A further improvement in data would signal that growth is sustainable. The economy still has material room to grow though uncertainty continues to weigh on the outlook.

Recent data points
Health of the consumer
– Retail Sales (MoM): 0.7% vs. -0.4%
– Core Retail Sales (MoM): -0.2% vs. -0.1%

Labour Market
– Net change in employment: 3.2k vs. 19.4k
– Unemployment rate: 6.5% vs. 6.7%

Inflation
– CPI (MoM): 0.0% vs. 0.3%
– CPI (YoY): 1.1% vs 1.3%
– Core CPI (MoM): 0.4% vs. 0.2%
– Core CPI (YoY): 1.1% vs 1.3%

Housing Market
– Building Permits (MoM): -5.8% vs. -2.8%
– Housing Starts: 214.1k vs. 252.3k
– New Housing Price Index (YoY): 3.3% vs. 3.3%
– New Housing Price Index (MoM): 0.2% vs. 0.4%

Activity
– GDP (MoM): 0.0% vs. 0.6%
– Ivey PMI: 58.5 vs. 67.6
– Trade Balance: -0.14B vs. -1.08B
– Manufacturing Sales (MoM): 1.0% vs. -0.6%

Market Indicators
– 10 Yr Bonds 1.505 vs. 1.471
– WTI Crude (MoM): $51 vs. $54

Since the last meeting, the price of WTI Crude dropped from $54.00 to $44.00 though has subsequently recovered to $50.71. The drop would obviously have an impact on inflation though core CPI (ex-food and energy) is still way below the 2% target. While the current recovery in oil prices is supported by discussions to extend the production cut by Opec and non-Opec producers, the increasing rig count and increasing inventories in the US are not helping. Added to this are the ongoing risks and uncertainty of US tax and trade policies which are still obviously weighing on the outlook.

If the oil price became stable and there was more clarity on US tax and trade policies this could lead to renewed business confidence and therefore an improvement in business investment which could give the BOC the continued improvement in data they so desperately want to see and an indication of more sustainable growth (long term view).

Until we have more clarity on these risks the Bank of Canada is going to remain on hold and the sentiment on the Canadian Dollar remains bearish while susceptible to moves in oil.

On Wednesday, in addition to the BOC meeting, we also have the release of FOMC meeting minutes from the 3 May meeting and then on Thursday, we have an Opec meeting.

As far as the FOMC meeting minutes are concerned, the market will be paying attention to forecasts for Q2 GDP, employment and inflation as a pickup was expected after softer data in Q1 was seen as transitory. In a speech by St. Louis Fed President James Bullard (hawk, nonvoter) last week, Bullard said that since the March meeting, inflation and inflation expectations have surprised to the downside and that financial market readings have been opposite of expectations and that the current path might be too aggressive though unwinding of the balance sheet should start soon.

Opec meet on Thursday and the market is expecting production cuts to be extended for 9 months by Russia and Saudi Arabia (recent rhetoric suggests an agreement has been made in principle) which could support the recent relief rally in oil and get us back up to $55. I don’t see the oil price moving higher than that until demand starts to pick up especially when considering that we are not seeing any slowdown in rig count out of America. In fact, according to Friday’s Baker Hughes Rig Count, we have seen an increase of 16 rigs since the last count a week prior to this release. That’s a total of 497 new rigs since this time last year.

These three events have the potential to create some volatility in the market and this could be a great trading opportunity for CAD traders.

My plan is to short CADJPY with a hedge on USDCAD

Assumptions

1. BOC will remain on hold and say more of the same resulting in CAD weakness
2. FOMC minutes confirm a June rate hike is data dependent and provide forecasts that are higher than recent data releases with no confirmation of an unwinding of the trade balance taking
place this year resulting in a move lower in the US10Y yield, Yen strength and USD weakness
3. Opec extend cuts on Thursday resulting in a move higher in oil and CAD strength

Considerations

1. With the market expecting an extension of production cuts on Thursday I expect to see a continued move higher in oil and that could result in CAD strength initially
2. It is possible that CAD is weak heading into the BOC meeting, despite the move higher in oil, due to the market trading their expected outcome of the BOC meeting
3. We had significant Yen strength last week after a dip in indices and the US10Y yield though Friday profit taking saw a move higher in indices, a slight recovery in the US10Y yield and Yen weakness across the board. Technical analysis on the US10Y and indices indicates that Yen strength could continue this week. Note that Comey was initially going to testify this coming Wednesday though this has been moved to a day or two after Memorial Day according to various news sites (date not yet confirmed).

Trading the BOC statement

If consideration 1 then I will look for opportunities to short CADJPY using a news scalp at the release of the BOC statement. (of course, if CADJPY moves higher at the release of the news this plan is null and void)

If consideration 2 and 3 then I will look for opportunities to short CADJPY at the start of the week at a bearish sell zone while making sure I see similar setups indicating Yen strength on other Yen pairs.

I will move my stop loss to breakeven as soon as I am able to do so. If I have sold off WM3 then I will place my take profit at the weekly target and let the trade run while moving my stop lower and locking in more profit as CADJPY makes further lower highs.

Trading the FOMC minutes

If my assumption about the FOMC is correct then my CADJPY trade will continue moving lower at the release of the news though this is when I want to enter my short USDCAD hedge using a news scalp (of course, if USDCAD moves higher at the release of the news this plan is null and void). Note that I will be trading USD weakness and not CAD strength with the goal of being long CAD ahead of the Opec meeting on Thursday.

I will move my stop loss to breakeven as soon as I am able to do so. I will look to place my take profit at obvious take profit zones while moving my stop loss higher and locking in profit as USDCAD makes lower highs.

Trading the Opec meeting

If at this point my assumptions were all correct and JPY did strengthen and USD did weaken after the release of the FOMC minutes then I want to lock in as much profit on both trades as possible as we head into the Opec meeting. If Opec disappoints markets resulting in CAD weakness then CADJPY should move lower and my USDCAD trade will be closed at breakeven or in profit. If Opec extends their cut and oil rallies then USDCAD should move lower and my CADJPY trade will be closed at breakeven or in profit.

Trading oil

1. Trade with the market heading into the Opec meeting with a well-managed stop
2. Scalp the news

Threats to this plan

1. The most obvious threat is that my assumptions are wrong though it’s a threat and not a risk because if I don’t get the setup I don’t take the trade and it’s moveon.com
2. The hedge could provide breakeven returns. This is certainly possible though it depends on how much profit I lock in on CADJPY before I enter the hedge on USDCAD
3. We have a release of US GDP and PCE on Friday so this might limit the reaction to the FOMC meeting minutes though again, if I don’t get the setup then I won’t take the trade

Note. In the technical analysis below I have CADJPY moving down though oil moving up, please make sure you have read the above plan to understand my analysis

CADJPY Daily

Market is sideways and stoch is bearish. We could see a turn up at the 50% level. Price is currently at resistance with a target of MS1 after coming off of MR1.

CADJPY H4

Market is sideways though price made a lower low relative to the previous low on 12 May and closed at the 61.8% fib retracement on Friday. Our stoch is overbought. The 61.8% fib predicts a target of 138.2% with MS1 a few pips above. Paying attention to confluence of new weekly pivot points with current resistance and the fib extension/ MS1.

WTI H4

Price made a higher high and closed above the weekly target. Pivot point theory tells us that price will move down to this week's central so if you are a bull you are paying attention to confluence with bullish entry points at $50.00 because price action shows us that is support and with price having made a higher high we expect to see a higher low followed by a higher high with resistance at 51.50/ 52.00. If price breaks that support then we are no longer trending. Keep an eye on new weekly pivot points and confluence with support at 50.00 and resistance at 51.50/ 52.00. Note that MM3 is a few pips above 51.50.

16 thoughts on “BOC interest rate announcement, FOMC meeting minutes and Opec meeting”

  1. Giveness TSHIMOMO says:

    Wow this is a great plan! I like how you’ve got it all planned out with the hedging and using the fundamentals to your advantage. this is great stuff. . . still have a long way to go till i am able to put things into place the way you did in this post. i also like how everything kind of supports each other and youre not just sucking this out of your thumb. Thanks for the post, it really helped me think.

    1. Ryan Gandalf van Jaarsveld says:

      Thanks bruv, I really enjoy coming up with these types of trading ideas. I am very keen to see how this one works out. It’s all about cause and effect.

  2. Hendrika says:

    Thank you Ryan I like the way you explain everything in detail.

    1. Ryan Gandalf van Jaarsveld says:

      My pleasure, let’s see if it’s a winner

  3. Teboho Faro says:

    read it twice its a lovely learning experience
    thanks very much Ryan

  4. frank says:

    nice trade plan bud,it make sense. looking forward on following your plan.

    1. Ryan Gandalf van Jaarsveld says:

      Thanks Frank – it’s going to be interesting to see if Opec can reach an agreement.

  5. Hadyn S. says:

    I’m always looking to improve the way I consider a trade plan, so as to eliminate as much doubt/risk as possible, and try as best I can to clearly show why I want to make the trade in the first place.(Fundamentally and technically) Your set up here is exactly the kind of standard that I need to be shooting for when creating a trade plan, as well as confirming my bias. Thank you, Ryan, for these beautiful post you do. I really do appreciate them. I’ve set new goals because of them, and strive to post some of mine as well. I also like the way Wayne highlighted certain key areas that might be slightly more impactful. Another excellent skill to be practicing. Cheers!

    1. Ryan Gandalf van Jaarsveld says:

      Thank you for your feedback Hadyn – I find fundamental analysis to be a lot like programming, logical arguments focused on cause and effect. Something I like to do on a weekend is review the week ahead and find an event that is going to create volatility and then break it down into its component parts and analyse it. It has to be my favourite part of trading. I also find that the more one does it the better one becomes and more aware one is of their errors. It really is a lot of fun and something I am very happy to be doing for many, many years to come. I’ll keep an eye out for your trade plans and be sure to give you some feedback.

  6. Rana Haq says:

    Thank you for your post as it covers different trade plan scenario, correlation, news event and risk. Also, technical analysis.

  7. Filipe Custódio says:

    First of all, Very nice structured and organized trade plan both technically and fundamentally. Just some thoughts as newbie that i’d like to share with a more experienced trader:

    – what if the recent rising in oil prices and opec meeting is the fuel that canada needs to turn hawkish and turn a deficit trade balance into a surplus again? Wouldn’t that be also an opportunity to go long on cad yen? Right now WTI is trading under the assumption that cuts will happen because it’s obvious that prices are rising in expectation instead of high demand. If the cuts do happen the demand for short term should increase predicting higher prices in the future right? Considering the daily cad yen one could also play a double bottom with a break of neckline at current MR1 in case of a favorable OPEC meeting and cad minutes

    – A rise in oil prices with a weak dollar followed by a decline in a FED rate hike at june could also provide a great opportunity go Short USD/CAD

    What do you think? Best regards

  8. Travis Streitz says:

    Love the trade plan. The attention to all the moving parts is very impressive. I especially like the hedge element you have included in the trade and how you explained how particular events could create different movements in both markets in which you are prepared to take advantage of or not depending.

  9. Horace Sutherland - FOREX.TODAY says:

    Thanks, Ryan, this is a well thought out post. I think you have set the bar in regards to how we should approach analysing the fundamentals and taking advantage of the technical setups provided by the market.

    Since last week we have seen USD/CAD held near 1.35 for most of Monday has traders/ investors cautiously await BOC and OPEC meetings.

    At the last meeting, the central bank raised its growth forecast and brought forward their forecast for economic growth and closing the output gap to the first half of 2018 (January) while at the same time we have seen an increase in oil prices which has resulted in a higher loonie.

    Although there has been mixed data since then, (better than expected Retail sales, Unemployment Rate & Ivey PMI Index and worse than expected CPI, Building Permits & Net Change in Employment) I believe that we should see a stronger loonie as the Canadian Central bank hold its rhetoric for modest growth and a stronger economy as well the expectations for a 6-9 months extension of production cuts on Thursday by OPEC.

  10. Dz Bista says:

    Excellent critical analysis from multiple views.
    I too prefer to combine fundamentals with technical as well as sentimental analyses to reach a confluence zone to entry and exit for reasonably higher probability of success.

    keep up the good work!

  11. Warren says:

    I like the way you think, very interesting post.
    Today I came across this post on the Opec website.
    http://www.opec.org/opec_web/en/4280.htm
    The India’s Minister of Petroleum and Natural Gas mentioned a few very interesting points.
    India produces 235 Million Metric Ton of crude annually or 4.7 Million Barrel per day capacity.
    They import 4 million barrel per day of crude and refine it and market it both in domestic and international markets.

    Dharmendra Pradhan asks OPEC to keep prices affordable for the following reasons.
    By keeping prices low, India can sell oil to the poorer countries which will increase demand.
    If the price of oil is too high the poorer countries will purchases cheaper fuels.
    Technology is also at a cross roads there is huge pressure to shift focus to solar, wind, Electric Vehicles, Hybrid cars.

  12. Arlissa Thiedt says:

    Hey, Ryan. I know it’s been a week since you posted, but I’m creating my own fundamental base and trying to catch up with the daily webinars w/ Wayne.

    But, something that I did notice is that you are predicting that oil will rise and cause CAD to rise for the short term based off the economic uncertainty w/US trade policies, and in the meantime that CADJPY will fall in correlation. I was doing some research and found that CADJPY rise in correlation with oil prices because JPY is a large importer and CAD one of the biggest exporter, even if they don’t export to JPY.

    So, I’m thinking the both would be a set up for a longer term long position due to CAD reliance on Oil and JPY, too. JPY does have a trade surplus, but not as strong of an economy to sustain any gains until repatriation or some other fundamental rally. CAD does have a slight trade deficit but they do have a stronger economy and can sustain some gains dependent on oil, especially since cuts are being made to inventory by OPEC and exports to the US are going to be cut as well (https://www.bloomberg.com/news/articles/2017-05-26/saudis-take-aim-at-swollen-u-s-oil-stockpiles-in-strategy-shift).

    I’m still working on my analysis, and I will being keeping up as much as possible with your analysis and w/ Wayne’s webinars. Thank you for your time and research, much appreciated!

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