Financial markets are gearing up for a wild week ahead. The world’s largest central banks are to announce their interest rate decisions. The Bank of Canada, the Federal Reserve, the Bank of England, and the Bank of Japan will all be in focus as traders and economists analyze their respective moves. As we read contradictory economic signals with one eye, market expectations are developing around rate cuts, especially from the Bank of Canada.
The Bank of Canada (BoC) is widely anticipated to cut its interest rates by 25 basis points in its upcoming meeting. That’s why alarming new data on Canadian employment, released last week, triggered fears of an economic “oopsie.” This combination has fueled discussion of possible easing of monetary policy. In August, the unemployment rate jumped to 7.1%. Yet, at the same time, the economy was hit hard with a loss of 65,500 jobs.
In the US, Fed Fund Futures (FFF) indicate a 90.4% chance of. This is the first time they have incorporated a 25 basis points Federal Reserve rate cut into their baseline scenario. This expectation is consistent with the larger narrative focused on the state of economic conditions on both sides of North America and what they mean for future currency values.
Employment Data Raises Concerns
Canada’s most recent employment numbers have adventured the curiosity of economists and policymakers. In China, the unemployment rate has shot up to 7.1%. Given this aggravating trend, we could expect the Bank of Canada to manifest a hawkish pivot. This is concerning as the primary employment figure, which dropped by a record 65,500 jobs, reflects the true systemic issues at play within today’s labor market.
These disappointing figures are likely to not just spur a rate cut, but shape the subsequent monetary policy decisions for the foreseeable future. Should the Bank of Canada choose a significantly more dovish tone, market traders will be all over it. As they react to signals of more easing, this might create large swings in the Loonie.
As markets await the BoC’s decision, analysts are closely monitoring how these employment figures will shape the bank’s outlook. The just concluded MPC meeting was the first to publicize their division of opinions. All five members favored cutting rates, four contending there should be no change at all. This internal divide points to a complicated conversation when it comes to understanding the most effective way to support Canada’s economic recovery.
Implications for Currency Values
The Bank of Canada is about to face a critical rate-setting moment. This decision will have serious implications on the worth of the Loonie. If the BoC cuts rates, it is possible that CAD would appreciate against its peers. If it indicates the close of the easing cycle, that could add to its appeal. Should the bank signal a further rate cut in October and December, the Loonie could find itself hard pressed. Otherwise, there will be strong downward pressure on the currency.
Market expectations about a possible future rate cut are showing up in today’s trading climate. Once again, CAD OIS indicates an 82.2% chance of a 25 basis points cut, underlining the prevailing feeling among traders that the central bank. Yet, if indeed economic conditions deteriorate or inflationary pressures pick up by surprise, those expectations can change.
Further helping the Loonie, positive market sentiment would provide an added boost since the Loonie is often treated as a commodity currency. With rapidly shifting commodity prices, traders will be closely monitoring how these trends impact monetary policy decision making.
Global Central Banks in Focus
At the same time, all eyes turn to the world’s central banks. But it’s the Bank of England (BoE) that’s on track to hit pound traders the hardest. Its next interest rate decision, due Wednesday, is poised to send waves through all of financial markets. On the other hand, the European Central Bank (ECB) has held its rates steady this week, a widely anticipated move.
Related currency pairs
On Friday, the Bank of Japan (BoJ) will decide on interest rates. This new announcement will further muddy the waters of an already complex global market dynamic. Each central bank’s decision will have a huge impact not only on their own currencies, but more importantly, on investor sentiment across the globe.