Canada - Common Economic Statistics

Overnight Target Rate

The overnight rate is what the Bank of Canada charges when lending money to other financial institutions on an overnight basis. Changes to this rate impact other interest rates including those for consumer loans as these rates move in conjunction with changes to the overnight rate.

The Overnight Target Rate is the interest rate that the Bank of Canada wants to see for the overnight rate, and any change in the target rate is a clear indication of the direction the Bank’s monetary policy will take. The Bank employs an operating band to influence the overnight rate – this band contains three rates, all of which fall within one half of a percentage point.

The mid-point of this band is the Overnight Target Rate itself and it is one quarter of a percentage point below the upper boundary of the band which is the current Bank Rate. The Bank Rate is what the Bank of Canada charges institutions for overnight loans. Other institutions wishing to lend overnight funds are forced to match this rate if they wish to be competitive so this is a very effective way for the Bank of Canada to influence the entire overnight lending process.

The lower boundary of the band – which is one quarter of a percentage point below the mid-point or the Overnight Target Rate – is the rate that the Bank of Canada pays on deposits owned by the financial institutions. The Bank always pays one half of a percent less than it charges for overnight funds and it is by moving the Target Rate – and by extension the upper and lower boundaries of the operating band – that the Bank is able to influence other interest rates.

Investors pay close attention to interest rates as an increase in interest rates usually results in a growing demand for Canadian dollars. This is because investors can expect higher returns as interest rates rise.

Operating Band

The Bank of Canada employs an “operating band” to manage interest rates in the Canadian economy. It consists of a target rate with an upper and lower boundary indicating interest charged on overnight loans and interest paid on cash deposits respectively.

The Bank of Canada operating band consists of three rates, all of which fall within one half of a percentage point. The mid-point of this band is the Overnight Target Rate and it is one quarter of a percentage point below the upper boundary of the band which is the current Bank Rate. The Bank Rate is what the Bank of Canada charges institutions for overnight loans. Other institutions wishing to lend overnight funds are forced to match this rate if they wish to be competitive so this is a very effective way for the Bank of Canada to influence the entire overnight lending process.

The lower boundary of the band – which is one quarter of a percentage point below the mid-point or the Overnight Target Rate – is the rate that the Bank of Canada pays on deposits owned by the financial institutions. The Bank always pays one half of a percent less than it charges for overnight funds and it is by moving the Target Rate – and by extension the upper and lower boundaries of the operating band – that the Bank is able to influence other interest rates.

Investors pay close attention to interest rates as an increase in interest rates usually results in a growing demand for Canadian dollars. This is because investors can expect higher returns as interest rates rise.

Prime Rate

The rate at which lending institutions charge their preferred customers. Because these customers represent the least risk, lenders can offer them the best interest rate. An increase in interest rates usually results in an increase in demand for Canadian dollars as investors can expect higher returns as interest rates rise.

The prime rate fluctuates in response to changes in the trend-setting Bank of Canada Overnight Target Rate which is part of the Bank of Canada's Operating Band. The prime rate is a commercial rate that banks advertise to the public and other interest rates such as mortgages and automobile loans are based on the prime rate and are often expressed as “prime plus” a certain percentage. Because these rates are advertised to commercial customers, the major banks typically charge very similar rates in order to remain competitive.

Bank Rate

The rate at which the Bank of Canada lends funds to financial institutions. The Bank Rate is an integral part of the Bank’s monetary policy and is the trend-setting rate from which other interest rates are derived. Because interest rates have a direct impact on currency valuation in the forex markets, investors pay close attention to changes in changes in the bank rate.

Canadian Overnight Repo Rate Average

Overnight repos are repurchase agreements where financial institutions sell securities to other institutions suffering a temporary cash surplus with the agreement that the seller will “re-purchase” the securities back at an agreed-upon price the next day. The Canadian Overnight Repo Rate (CORRA) is the weighted average of the repo transactions reported for the overnight session.

Overnight repos are used mostly by large financial institutions that require cash for events such as end-of-day settlement. Typically, these institutions will have assets held in various notes and bonds that they can offer as collateral to institutions with surplus cash. In effect, institutions requiring cash sell bundled assets with an agreement to repurchase at a pre-determined rate the next day. Usually, the overnight repo rate average (CORRA) is less than the bank rate.

For the repo buyer, an overnight repo represents a means to access the capital it requires without liquidating assets. In exchange, it pays a fee to the repo buyer in the form of an agreed-upon interest rate. For the repo seller, the agreement enables the buyer to use its surplus cash to earn additional interest than could be earned on deposit with the bank of Canada.

Overnight Money Market Financing Rate (OMMFR)

The average rate that financial institutions pay to borrow overnight money from institutions with surplus funds. Changes to this rate can influence interest rates banks charge for commercial loans as well as the yield on bonds and other fixed income instruments.

The Canadian Overnight Money Market Rate (CORRA) is used by financial institutions to borrow money to cover a shortage of funds (primarily for end-of-day settlement) from those institutions with a surplus of funds. The benchmark rate for the overnight market is the overnight Bank Rate offered by the Bank of Canada, but institutions are free to set their own rates depending on the financial instruments included in the transaction as well as the risks and collateral involved in the loan. The OMMFR is the average of the rates reported by the participating institutions.

The most commonly used instruments are term deposit receipts, repurchase (repo) agreements, and uncollateralized bank loans.

Fixed Income Yield

Tracks the historical return for the specified bond. Bond yields have an inverse relationship with interest rates – this means that as interest rates rise, bonds traded on the secondary bond market with fixed interest rates become less valuable.

A bond is the equivalent of a loan where the bond issuer (the borrower) receives money from the bond holder (the lender). In return, the bond issuer agrees to repay the original bond amount (the principal), plus interest (the coupon), by the designated due date (the maturity). Because bonds pay a pre-determined interest, they are said to be a fixed-rate instrument.

When interest rates increase, new bond issuers will pay a higher yield in order to compete with other investment options. This means that bonds issued prior to the interest rate increase and paying a lower yield than the new issues, are now worth less relative to the new bonds. This fact will be reflected in the value of the bonds being traded on the secondary bond market. Because bond vales are tied to interest rates in this manner, bond speculators pay very close attention to changes in interest rates.

Yield Curve

The yield curve plots the return on various fixed income instruments. The shape of the curve illustrates the relationship between expected yields and time to maturity. In Canada, the Bank Rate is the reference rate for short-term interest rates and yields on new domestic bond issues reflect changes to the Bank Rate.

Bond yields are based on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting the additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between bond yields and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors willing to lock their money into long-term-bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that short-term interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or possible recession. An inverted yield curve shows even greater long term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock in investments at the current rate in the belief that yields will continue to fall in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long term yields are equal but medium term yields are higher. This could indicate an expectation that the economy may be entering a period of growth but this growth is not expected to be sustained for the long term.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the approach that best enables economists to determine if the economy has increased or contracted when compared to the previous results.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Labour Force Survey

Monthly survey that provides a snapshot of current employment rates, hours worked, and a breakdown of employment by sector. Employment increases are seen as an indication of a robust economy expanding to provide employment opportunities and additional wealth for the population which usually increases demand for the dollar.

Statistics Canada produces the Labour Force Survey (LFS) each month and polls approximately 60,000 households to gain an accurate assessment of employment levels within the country. The LFS breaks down employment data into various categories including employment by sector, average wages, and average hours worked.

The survey is conducted around the 15th of each month. The primary goal of the LFS is to assign all Canadians of working age into one of three categories: employed, unemployed, or not in the workforce.

Unemployment Rate

The unemployment rate is expressed as the percentage of the eligible workforce (i.e. those of working age) currently searching for employment but unable to secure a position. For this calculation, unemployed refers to those actively searching for employment while those that have stopped looking for one reason or another, are not included.

An increase in unemployment is seen as a negative indicator as job losses are typically triggered by a lower demand for goods and services. The obvious impact of rising unemployment is a decline in consumer spending as unemployment benefits do not cover the full wages workers earned earlier; a reduction in spending is an immediate response by affected households.

Add to this the fact that workers currently employed but feeling vulnerable with respect to their continued employment, also typically reduce spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

In Canada, most unemployed people qualify for Employment Insurance payments when they lose their job. This number however, does not equal the number of unemployed people in the country because not all unemployed qualify for employment insurance. Some people – those on maternity leave and some seasonally-employed workers for instance – are expected to return to their former jobs.

Retail Sales

Provides feedback on consumer spending and is one of the first sales reports available each month. Tracks spending on consumer goods exclusively and does not include expenditures on services such as health care and education. An increase in retail sales has a positive effect on currency as it shows growth in the country’s economy.

The Retail Sales report is published without accounting for inflation, so to get a true measure of real change in retail spending, you must adjust accordingly. It is not uncommon for the sales report to undergo significant revisions even after it is released as compiling accurate and complete retail sales data can be very difficult.

Core Retail Sales

The Core Retail Sales report provides the same information as the Retail Sales report but purposely excludes vehicle-related expenditures including new car sales and gasoline purchases. An increase in Core Retail Sales has a positive effect on the dollar as it shows growth in the economy.

The Retail Sales report is published without accounting for inflation, so to get a true measure of real change in retail spending, you must adjust accordingly. It is not uncommon for the sales report to undergo significant revisions even after it is released as compiling accurate and complete retail sales data can be very difficult.

Housing Starts

The Housing Starts report reveals the number of new, privately-held homes for which construction began during the reporting period. The Housing Starts report is considered one of the most insightful indicators of the overall health of the economy and also reveals a great deal about the level of confidence the public has for their economic future.

New homes are likely the greatest single investment most individuals will make, and the majority of new home purchasers will require long-term mortgages in order to buy their homes. If housing starts are increasing, this is a sure indication that there is sufficient money available in the financial system to fund new development. It also suggests that the public has the confidence to enter into mortgages as they feel they will be able to maintain the required payments.

On the other hand, if housing starts fall, it indicates a drop in demand for new homes and this is usually interpreted as an indication – or actual confirmation – of an economic slowdown. The housing industry is one of the country’s largest direct employers and supports many spin-off industries that also rely on home sales to drive their business. Therefore, it is always a concern when the pace of housing starts falls and this can put downward pressure on the value of the dollar.

Purchasing Manager’s Index

The PMI is seen as a way to measure the optimism of the country’s manufacturing sector and as a forecast of economic growth by reporting monthly changes in purchases made by Canadian manufacturers. A value of 50 indicates an increase in purchases, while a value below 50 indicates a decrease.

A representative sample of executives provides feedback on purchasing and confirms if purchase levels have increased, decreased, or remained the same from the previous month. The premise for the PMI is that as sales increase, purchasing managers must acquire additional materials in order to produce more finished goods. An increase in the PMI is also seen as a vote of confidence for the economy as additional output indicates greater capacity in the economy and firms tend to increase spending only when they are reasonably certain of continuing demand for their products.

Like any of the production and sales indicators – CPI, Retail Sales, etc. – a sharp increase in PMI might be a warning of a rise in inflation. Despite this however, a higher PMI index is generally seen as positive for the economy and usually supports continued demand for the dollar.

Producer Price Index

Measures the change in prices for goods sold by the manufacturer using an index of 100 as the base. Unlike the Retail Sales figures, the PPI does not include taxes or any other shipping or distribution fees typically added as products move through the supply chain. An increase in the PPI index suggests an expanding economy with reasonable assurances of continued employment for those working in the manufacturing sector.

The PPI has a high market relevance and is closely watched as an indicator of current inflation levels. Like other inflation-based indicators, increasing PPI values could signal an interest rate hike intended to combat inflation. A possible interest rate hike may increase demand for the currency as an investment option as investors can expect increased returns as interest rates rise.

Core Producer Price Index

Based on the Producer Price Index, the Core PPI excludes volatile items such as energy and food which can distort the PPI figures should there be a sudden spike in oil prices or other unexpected event. By eliminating those items that often skew inflation statistics, the Core PPI is looked upon as a more reliable means of forecasting inflation than simply the PPI.

Core Consumer Price Index

The Core CPI is calculated in the same manner as the CPI but items with high volatility – such as energy and food – are excluded. Because these products are vulnerable to dramatic price swings, they can lead to a distortion in the CPI calculation. For this reason, the Core CPI is considered a more accurate measure of inflation.

Consumer Price Index

The Consumer Price Index (CPI) is considered one of the most effective indicators on the current state of inflation in an economy. When high inflation becomes a concern, investors will abandon the currency in search of other investment options thus lowering the demand for the dollar on the forex markets.

Inflation is necessary if the economy is to experience growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the dollar. CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100.

If the CPI for the current period is 112, the indication is that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts).

If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit means that more money left the country than entered the country in the form of exports and other transfers.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the FX markets which could cause the domestic currency to lose value against other currencies.