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