BOC Shocks Markets by Cutting Rates, USDCAD Surges!

Have you ever been punched in the gut when you weren’t looking? I hope not, but if you were a loonie bull this morning, now you know what it feels like. The Bank of Canada shocked traders by cutting its main interest rate by 0.25% to 0.75%, claiming that the rate cut would provide "insurance" against the downside risks of oil’s price slump. The statement further noted that it expected Canada’s economy to gradually strengthen in the H2 2015, with real GDP growth averaging 2.1% in 2015 and 2.4% in 2016, with a return to full capacity around the end of 2016.

Not one of the 22 economists surveyed by Bloomberg were expecting a cut, and the market’s massive reaction confirms traders’ surprise. USDCAD saw a major breakout above key psychological resistance at 1.20 yesterday, forming a large Bullish Marubozu Candle* in the process. This bullish candlestick pattern shows strong bullish momentum, and combined with today’s surprising bullish catalyst from the BOC, provided the perfect recipe for a surge in USDCAD. Meanwhile, the MACD indicator shows strongly bullish momentum, and though the RSI is overbought, rates could certainly rally further after such a strong fundamental catalyst.

As we go to press, the pair is pressing against the 78.6% Fibonacci retracement of the entire post-GFC drop at 1.2280. This key resistance level may lead to a pause in rates, but the BOC’s decision represents a major unexpected shift in monetary policy, so we wouldn’t expect a major reversal off that level. If bulls can push USDCAD above 1.2280, a continuation toward key psychological resistance at 1.2500 could be seen next.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.