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As the American economy has continued to weaken over the past few months, a number of other nations have also been heavily impacted. One of the hardest hit is Canada, as the country sends close to 75% of its total exports to its Southern neighbor every year. In fact, Canada is, thanks to most recent GDP report, seeing an annualized contraction of nearly 0.4% a year in its economy, suggesting that the nation may already be in recession territory. As a result, many investors will take a closer look at the country’s central bank to see what it can do in order to help boost the economy back into growth as the Bank of Canada meets later today to give its decision on rates.

Not too long ago, Canada was the envy of the developed world; the nation saw robust demand for its many commodities, its banking sector was relatively unscathed by the subprime crisis, and the Bank of Canada was raising rates to their current level at 1.0%. Yet, now investors are largely pricing in a cut in rates by year’s end in order to help boost the economy back to growth and get Canada out of its current malaise. “The market has already guided expectations toward 50-50 on a rate cut by December,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada. “It will all be about the guidance, but with a negative GDP and a deteriorating global backdrop, one would expect Carney to take a dovish tone. The Canadian dollar is trending toward parity.” [ETFs For The Forgotten Asset Classes]

Furthermore, given Canada’s relatively solid fiscal position– the budget deficit is below 5% while inflation is well below two percent– the appetite for more stimulative measures may be there in the country, unlike in the U.S. “Indeed, the case for fiscal policy may be even stronger in Canada where longer term debt dynamics are less likely to be compromised by near-term stimulus efforts,” said Mark Chandler, at RBC Capital Markets. As a result, investors could see talk of a rate cut appear at today’s meeting, potentially helping to give a nice boost to Canadian equities in the process [Seven ETFs To Invest Like Peter Schiff].

Thanks to this key event, investors should look for the IQ Canada Small Cap ETF (NYSEARCA:CNDA) to remain in focus throughout today’s trading session. The fund tracks the IQ Canada Small Cap Index which is a market cap-weighted benchmark that seeks to provide investors with a means of tracking the overall performance of the small capitalization sector of publicly traded companies domiciled and primarily listed on an exchange in Canada. Top sector holdings include basic materials and energy, which combine to make up nearly 70% of total assets.

Given the increasingly poor global economic situation and the historically higher levels of volatility that small cap companies exhibit, it has been an extremely rough stretch for CNDA. Although the fund has gained close to 5.2% in the past two weeks, it has lost close to 10% in the past quarter and nearly 17.6% in the past half year period suggesting that extreme headwinds are facing small cap Canadian stocks. If Mark Carney and the rest of the team at the Bank of Canada look to cut rates before the year is out, investors could see CNDA rise sharply on the day. If, however, it appears as though monetary policies will not get any looser, investors who were hoping for more stimulus may abandon Canadian stocks and push this Index IQ fund even lower in Wednesday trading [see more charts of CNDA here].

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Disclosure: No positions at time of writing.

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Source: Bank Of Canada Rate Decision Brings IQ Canada Small Cap ETF Into Focus