Tuesday, July 19, 2011

Bank of Canada Kept Rates Steady at 1.0%

Previous session overview

The euro loses some luster on a continuing lack of clarity over solving the region's debt crisis: A French banking group says a bank tax is not a solution to Greece's problems. 

That adds to the sense that not many folks in the region are on the same page, especially after Merkel strikes a blow to the common currency by saying the euro-zone's continuing debt crisis wouldn't end with one "spectacular" solution, including any agreement reached at a summit Thursday. 

Meanwhile S&P chimes in, saying the European bank stress tests could have been more challenging, and didn't consider the implications of a sovereign default on the banking sector. The euro is looking heavier around USD1.4150, now up just 0.3%.

Elsewhere EURCHF surged to CHF1.1655 for a 1 1/2 cent gain amid reports Switzerland would be paying Germany up to EUR10 billion due from tax avoidance. GBPUSD tracked EURUSD, adding one cent to USD1.6160, USDJPY traded JPY78.89-JPY79.05.

The Canadian dollar touched a session high after the Bank of Canada, in line with expectations, kept rates steady at 1.0%. The U.S. dollar fell to CAD0.9516 from CAD0.9552 ahead of the rate decision and from CAD0.9597 late Monday. 

The Bank in its policy document said withdrawal of monetary policy stimulus "would need to be carefully considered." The Bank now sees the core inflation rate staying around the 2% target through 2013, while the headline rate is expected to stay over 3% in the near term and return to the 2% target by the middle of 2012, when the economy is seen returning to capacity.

Market expectation

If the USDCAD happens to drop past recent lows, expect further critical levels at CAD0.9505 (Daily Low May 4) and CAD0.9473 (Lower 21 Day Bolli Band). Above, resistance is placed at CAD0.9635 (Daily High Jul 18), CAD0.9667 (21-Day MA) and CAD0.9668 (July 13 High).

Aussie has raised above the 55-DMA (USD1.0649) and 21-DMA (USD1.0654) Resistances. A test of USD1.0700 looks likely in the coming sessions and a strong break above USD1.0700 would take the pair further up towards USD1.0780. While USD1.0700 holds, we might see a dip to USD1.0600 once again, analysts said.

They add: Overall the pair is expected to retain its USD1.0500-800 sideways range and we will have to wait for a breakout of this range to get clear idea on the further direction of move.