Bank of Canada (BoC)



The Bank of Canada is in charge of the CAD (Canadian Dollar), one of the eight most traded currencies in the world.

As such, the BoC is Canada’s Central Bank.

But what makes the BoC tick?

And how many times does it decide monetary policy?

Let’s find out.

Bank of Canada's Mandate

The Bank of Canada has the most straightforward mandate of them all.

According to the Bank’s official website:

“The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable.”

No need for translation here.

Like many other Central Banks we’ve covered, the BoC cares mostly about inflation (price stability).

The Bank of Canada cares about inflation.

As such, we could say CPI releases are by far the most important kind of data in FX markets since they’re closer to influencing interest rate decisions.

Awesome.

Now tell me more about the Bank, how is it structured? How do they make decisions?

BoC's Structure

In terms of hierarchy, the top goes like this:

1.    Board of Directors

2.    Governing Council

3.    Senior Management

What we care about is the Governing Council since it is the one making monetary policy.

The Governing Council has six members: the Governor, the Senior Deputy Governor, and four Deputy Governors.

Interest rate decisions are made every six to seven weeks.

Which means the Bank of Canada announces rate decisions eight times per year.

Decisions are reached by consensus in the Governing Council. And this only occurs after the Council has been briefed by an army of economists at the BoC.

So far so good.

BoC VS Other Central Banks

So the BoC isn’t that different from other Central Banks.

It cares mostly about inflation.

It has a Governing Body which makes interest rate decisions.

And it decides on monetary policy (rates) eight times per year (similar to other banks, with the exception of the Swiss National Bank).

So what differentiates our treatment of the Bank of Canada and the CAD?

Well… even though the Central Banks have very similar structures and mandates (which is good, they borrow best practices), their economies differ.

Different economies have different needs.

There will be a series of articles with the profile of the eight economies we care about in FX (each economy and its currency):

United States, USD

Eurozone, EUR

United Kingdom, GBP

Japan, JPY

Canada, CAD

Australia, AUS

New Zealand, NZD

Switzerland, CHF

But a quick and easy answer: Canada’s economy depends heavily on oil.

Therefore, oil price swings often carry themselves over to the CAD.

How?

Canada exports oil, so a higher price means more cash for Canada (good).

Lower oil price means less money from exports, which is bad for Canada.

For the CAD, Oil matters.

That which is good for Canada’s economy, is good for its currency (the CAD).

Hence, strong oil prices lead to a strong CAD, and vice versa.

But this isn’t always the case.

We will check this out more in depth in an article of its own, so don’t worry.

Bank of Canada and FX Markets

As you may already know, what moves currency prices most is interest rate decisions (and other tightening/loosening measures).

Thus, paying attention to a Central Bank’s stance is important, since it will allow you to prepare for when these decisions arrive.

Using an economic calendar and a solid news feed, you’ll be able to get the date of such policy decisions, and the predictions or consensus on what the decision will be.

Even if a decision comes in as expected, the markets can react abruptly since there’s always traders and investors holding out to see if the Bank surprises.

Always check the economic calendar for market-moving events.

For example, you may want to buy several blocks of CAD, but there’s a monetary policy decision due this week.

The decision is forecasted to maintain rates unchanged, however, you don’t want to risk it, and choose to wait for the Bank of Canada’s actual decision.

On the other hand, if the Bank does surprise everyone by, say, revising its inflation expectations down (when the markets thought they would remain high)…

Or if the Bank actually changes rates when no change was expected (or doesn’t change them when they were expected to)…

Then you will see serious price action that day, and possibly the rest of the week (maybe even more, depending on the base case).

That it.

See you soon,

Emil Christopher,

The Forex Economist

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