Canadian Overnight Rate; Recent Jobs Gains likely to Influence Decision

The Overnight Rate is the interest rate at which major financial institutions in Canada borrow and lend overnight funds among themselves.

Short-term interest rates are predominant factors in currency valuation. This is highly correlated with the economic outlook as its changes can impact both inflation and recession.

With over 75% of the eligible population being fully vaccinated, the Canadian economy has been re-opening over the past few months, after a strong rebound was recorded at the start of the year following significant losses in 2020, but has since slowed through the spring and summer largely due to the effect of the Delta variant.

Canada’s overnight rate has remained unchanged after the Bank of Canada lowered its overnight rate in the month of March 2020 from 1.75% to 0.25%, as the economy added 157,000 new jobs last month according to Statistics Canada. The figure which was enough to put employment numbers back above the pre-pandemic level was also sufficient to push the jobless rate down two ticks to 6.9% the lowest unemployment rate since the pandemic started.

Canada’s annual inflation rate accelerated to an 18-year-high in September after it rose to 4.4% compared to the forecast of 4.3%, which according to Derek Holt, vice president of capital markets economics at Scotiabanksuggests there is still momentum at the margin in terms of inflationary pressures that cannot be dismissed on the base effects and other factors, so it’s still a sustained overshoot”. The monthly Consumer Price Index rose 0.2% in September which indicates month over month CPI growth has been positive for nine consecutive months.

Canada’s 2021 budget included substantial announcements related to COVID-19 recovery, including $21.1 billion towards programs and funding supporting jobs and businesses. However, Governor Tiff Macklem believes the economy is moving closer to the point where the bank of Canada will no longer need to continue adding stimulus to the economy through its quantitative easing (QE) program, but it is not there yet.

Across-board, Lower Overnight Rate will provide a boost to the broader economy by improving cash flow, encouraging spending and investment, which will increase economic activities and boost employment.

Economists predict that Canada’s economy will grow 6.1% in 2021, Nevertheless, Traders should brace themselves as surprise rate changes often have a great impact on the forex market, an increase in the interest rate will usually strengthen the Canadian Dollar (CAD) while lowering the interest rate will usually weaken the Canadian Dollar (CAD). The pairs to look out for during the news release include USDCAD, GBPCAD, EURCAD, CADJPY, CADCHF, AUDCAD, NZDCAD, etc.

Time Schedule for Overnight Rate release:

Date: Wednesday, 27th October 2021

Time: 3:00pm (GMT+ 1)

Francis Idowu is a Forex Dealer, Financial market analyst and writer, Data Analyst, and Financial Market Strategist with a background in Economics. He specializes in market strategies, Forex fundamental and technical analysis, and has spent over two years as a financial market contributor, observer, and trading coach. He is well known for his informative analysis of the global economy, fiat currency, commodities, Stocks, Indexes, Futures, and Options markets. He held a Bachelor's degree in Economics and Diploma in Structured Programming and Data processing.