Tomorrow (September 6) at 3:00 PM GMT the Bank of Canada (BOC) will print its monetary policy decision.
Think you’re ready to trade the event? Here points you need to know before you place your orders:
What did the BOC say last month?
In case you were too busy organizing your Game of Thrones viewing parties last month, you should know that BOC had raised its rates for the first time in SEVEN YEARS. That’s about how long it takes to replace all of your body’s cells!
What made last month’s decision even more interesting is that the central bank was optimistic on the economy’s growth, so much so that it upgraded its growth forecasts even as it downgraded its inflation estimates. And even then the BOC shrugged off lower inflation pressures as “temporary.”
Another important thing to note is that BOC Governor Poloz also straight up said that “I don’t doubt that interest rates will move higher” because “the economy clearly no longer needs as much stimulus as we’ve been giving it.”
Not surprisingly, the optimism that accompanied the interest rate hike extended the Loonie’s already unrelenting rally.
What are market players expecting this week?
A week ago traders probably would’ve said “Psssh, no way the BOC is gonna hike rates back to back!” After all, a rate hike in September would make more sense.
See, unlike tomorrow’s event, BOC’s October statement will be accompanied by a monetary policy report AND presser an hour later.
Others also point out that Poloz and his team have room to wait before making further policy changes. With Trump putting the spotlight on NAFTA again and hurricanes in the U.S. affecting global oil supply and outlook, the BOC can afford to sit this one out.
Last but not the least, some have remarked on the pains the BOC took to communicate its hawkish bias leading up to the actual decision. But since members have been tight-lipped since then, market players are speculating that this month’s decision will be a snoozer.
But that was last week. Last Friday Canada’s GDP report showed the economy not only hitting its strongest quarterly growth since Q3 2011 and the strongest year-on-year growth since Q1 2006, but the 4.5% quarter-on-quarter (annualized) growth also left the BOC’s 3.4% estimates eating dust.
Since then overnight index swaps markets reflected a 50% chance of a rate hike in September, up from a mere 20% before the GDP release, while the latest CFTC COT report also reflected more demand for Loonie longs. Wowza!
It also helps rate hike junkies to know that two out of three of BOC’s preferred measures of inflation ticked higher in July, supporting the central bank’s claims that downward pressures to inflation are “temporary.”
That doesn’t necessarily mean that Poloz and his crew are ready to pull the trigger this month, though. The central bank was careful NOT to communicate their future biases. In its July statement it concluded with (emphasis mine):
“…the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.”
Poloz also flat out refused to give clues on the central bank’s next moves, saying that “I’m not going to make a forecast about the interest rate.”
With BOC officials keeping their cards close to their chests, it looks like we’ll have to wait for the actual decision to know that the central bank members are thinking.
We do know that the odds of a rate hike are pretty even, though, so price action will likely be volatile whichever direction the BOC swings. Make sure your trading plans and executions are tight if you do decide to trade the event!