Now that the Reserve Bank of Australia has fired the first salvo on this week's interest rate decisions, it's time to shift our focus on the Bank of Japan (BOJ) and the Bank of Canada (BOC). What factors are weighing on their decisions this week?
Bank of Japan
In their last interest rate decision, the BOJ peeps unanimously decided to keep interest rates at a range of zero to 0.10%. Not only that, they also agreed to add 10 trillion JPY to the asset purchasing program established in 2010.
If you recall, the BOJ cut short its usual two-day meeting to time its statement with the Ministry of Finance's (MoF) solo currency intervention. In fact, the decision was also announced just days after the Swiss National Bank acted to weaken the franc. Talk about determination!
This time around, market geeks are waiting to see if the BOJ has any other tricks up its sleeve. But after increasing its asset purchases program AND actively weakening the yen last month, chances are that Japanese officials will take a chill pill this month.
Still, it doesn't mean that the BOJ and MoF aren't closely watching the economy and the yen's price action. After all, word on the street is that the BOJ may have to downgrade its economic growth outlook in the face of Japan's threatened export industry and concerns on global economic growth. Make sure you don't miss this one, alright?
Bank of Canada
In its last rate decision way back in July, the BOC maintained its target for the overnight rate at 1%. Tomorrow, we'll probably hear more of the same... with a few dovish words to boot!
That BOC Governor Mark Carney declared in a recent speech that the central bank would be "prudent with respect to the possible withdrawal of any degree of monetary stimulus" suggests that the BOC doesn't want to pull the life support plug on the economy just yet. If you ask me, that's a wise decision!
After all, Canada is coming fresh off its first quarterly contraction since 2009. Q2 2011 recorded a 0.4% drop in GDP on a 2.1% decline in exports, one if its biggest cash cow industries. You don't think the BOC will let this go unnoticed, do you?
As for its growth forecasts, don't be surprised to see a slash here and a cut there! The central bank forecasted 2.8% growth in Q3 2011 and 2.9% in Q4 2011, but keep in mind, these predictions were made way back in July. As such, they don't reflect recent developments, which to be frank, have been quite ominous.
Just take a look at the Ivey PMI, which marked a sharp decline in economic activity in July. The index dropped from 59.9 to 46.8 in just one month, suggesting a disturbingly slow start to Q3.
All these taken into consideration, the BOC will probably adopt a wait-and-see approach and make no changes in its rate statement tomorrow at 1:00 pm GMT. But be mindful of the BOC's official words!
If the central bankers sound more cautious than they did back in July, the Loonie could weaken further. On the other hand, if they hint about future rate hikes, expect the Loonie to strengthen!
A bit of advice to those of you who plan on trading these rate decisions: remember to stay flexible and listen closely! Markets tend to be extra volatile during big events like these. We must take extra care to interpret central bankers' words and understand what they imply about future monetary policy.
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- Thursday Doubleheader: BOE and ECB Rate Statements 05:43 07 November 2012
- A Tale of Two Central Banks 05:53 03 October 2012