Bank of Canada held its reference rate steady at 1.0% as expected. But the accompanying statement was much more dovish than expected, in line with falling inflation rate which has dropped to 0.8% in November, a new low for 2012. GDP is also seen struggling in Q3 posting 0.1% growth Q/Q. On hindsight, a dovish tone should not have shocked the market given the dismal data. However BOC has maintained a hawkish stance for most part of 2012 due to concerns over high household debt. Household debt to income ratio reached 163% in Q3 2012, a historic high, and BOC was worried that easing rates would spur even more demand for loans. That concern is placed on the back burner, with BOC saying “muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of such withdrawal is less imminent than previously anticipated”.
What is surprising is the reaction following the news. It is confusing to see CAD weakening as BOC simply said they are not going to raise rate so soon. Though many analysts believe BOC would maintain it’s “tightening stance”, conservative estimates place potential rates increases in 2014, with the earliest coming in late 2013, which is in line with BOC’s statement. But CAD weakened it did, and resulted in a strong bullish momentum in NZD/CAD. Price is pushed up higher immediately and broke away from the rising Channel. The inevitable pullback that followed was also well kept above the Channel top, potentially forming a new rising trading channel with the same gradient.
Hourly chart looks like a microcosm on the Daily Chart, with price breaking away from the rising Channel. However, while Hourly Chart has established a new footing in the form of the previous Channel top, this is not immediately obvious on the Daily Chart. There remain a chance that price could trade back into the Channel once more. Stochastic also suggest such a possibility, with readings peaking in the Overbought region. Looking back since 1st Oct 2012, everytime stochastic peaked in conjunction with a touch on Channel Top resulted in price heading lower towards the Channel Bottom. Past patterns does not guarantee future occurrences , but one would be prudent to consider various outcome possibilities.
Keep a lookout of Canadian GDP data which will be released next Thu. With BOC downgrading 2012’s GDP forecast from 2.2% to 1.9%, we could see a lower than expected GDP data which could give us the bullish breakout on NZD/CAD.
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