One of the most expected events in the currency market is a central bank’s interest rate decision. It is the level of interest rate that moves a currency, and traders always position themselves way ahead of the actual interest rate announcement.
For this, they collect and interpret data released between two interest rate announcements. The aim is to form an educated guess about what the central bank might do when it meets to review the economic performance.
Bank of Canada’s interest rate decision this Wednesday is closely watched by traders around the world. It is expected to keep the interest rate close to the zero boundary at 0.25%. Like many G10 central banks, the Bank of Canada dropped the interest rate close to zero during the pandemic so as to stimulate the economy in such uncertain and difficult times.
Things to Consider Before the Bank of Canada Interest Rate Decision
Last Friday, it was the NFP day. As it is accustomed, the Canadian job data comes out at the same time, making it difficult to trade the USDCAD pair.
The unemployment rate remains above 10% in Canada (10.1%), albeit dropping slightly from 10.9% in the previous month. The Canadian economy added over 245k jobs, continuing the positive trend started a couple of months earlier. However, keep in mind that the data is distorted due to government support during the crisis as temporary unemployment and permanent unemployment are difficult to measure still.
The trade balance, which shows the difference between imported and exported goods during the month, declined further to CAD-2.5 billion. Labor productivity for the last quarter declined surprisingly, reaching almost 10% on expectations of 6.5% – another data likely distorted by the coronavirus pandemic.
Bank of Canada, therefore, has a tough job in correctly interpreting the data before announcing the interest rate decision. The focus this week will be on the size of the stimulus, and if Bank of Canada sees it appropriate to increase the balance sheet faster.
There is chatter in the market that the Fed is about to expand its quantitative easing program even further, with a possible announcement as soon as the next meeting. If that is the case, the Bank of Canada will not remain behind as it is known to follow the Fed’s footsteps when it comes to monetary policy.