Summary:

• Bank of Canada is expected to increase interest rates, decision will be released at 3pm BST on Wednesday
• Janet Yellen will deliver her testimony to the Congress on Wednesday (3pm BST)
• Markets like USDCAD and USDJPY could be heavily influenced 

It could be a summertime but this Wednesday is bound to be anything but calm on financial markets. Two main events of the week, Bank of Canada decision and Janet Yellen’s testimony will influence markets at exactly the same time. We provide a short analysis of both.

Bank of Canada (BoC) decision

It is not that common for global market to focus on Bank of Canada. However this time, the meeting is very important. The Bank has maintained very low rates (main rate at 0.5%) since 2015 even as the Fed increased rates 4 times. Investors are nearly certain it will change on Wednesday. Bloomberg calculates that a probability of interest rate increase is as high as 94% and 22 out of 30 surveyed economists expect such move. These expectations are not out of nowhere –  BoC policymakers have signaled recently that the economy is doing fine and might not need extremely low interest rates. 

Macroeconomic data from Canada has been very good as of late but inflation has disappointed. Source: Macrobond, XTB Research 

Is such a move warranted from macroeconomic perspective? Most of the data from the Canadian economy has been very strong as of late. The latest NFP report was far better than in the US and indeed we can see that employment growth has accelerated. On top of that consumer confidence is strong, business sentiment is near extreme optimism (again, this survey has recently shown a better print than a corresponding one from the US) and output is rising at a high pace. However, the BoC could be worried by a recent downward trend in inflation and a slump in oil prices that is not helping the Canadian energy sector. To sum up, from macroeconomic perspective interest rate hike could be warranted. However, keep in mind that  it’s been nearly fully priced (recall – 94% probability) so a disappointment caused by a lack of such move could have much stronger market implications than a scenario where expected hike is indeed delivered.  

USDCAD has been in a strong downward caused by increased chances for interest rate hike in Canada. The nearest support seems to be located around 1.2768 whereas the nearest resistance could be at a broken 1.30 level. Source: xStation5 

Yellen’s testimony to Congress

Jenet Yellen, a president of the Federal Reserve delivers a semi-annual testimony to Congress this week (Wednesday 3pm BST and Thursday 3pm BST). This is a very important event for the markets because she will provide her assessment of the US economy and guidelines for the monetary policy for the second half of 2017. The Fed has increased interest rates 4 times since December 2015 and while this supported the
US dollar initially, 2017 has brought depreciation of the US currency as expectations for future interest rate increases have waned. Therefore for the dollar it is extremely important whether Yellen confirms willingness to increase interest rates again this year. While her testimony begins at 3pm BST, a statement itself will be released at 1:30pm BST and this is when we can expect the first reaction.  

USDJPY saw a big ABC correction as investors became disappointed with Trump policies and relatively week data from the US economy. The macroeconomic data has improved recently leading to recovery in USDJPY. Yellen’s testimony could be crucial as this pair approaches a strong resistance between 114.30 and 115.60. Source: xStation5