Is my Bluetooth Connection to Magic Track Pad Encrypted?

All bluetooth connections to Mac OS X are lightly encrypted by default as part of the pairing process. Unless someone is bringing an intentional effort (e.g. technical knowledge and specialized hardware) to bear, your keyboard and data connections are more secure than a good WiFi network. Cracking encrypted bluetooth is not easy unless you can access the computer or capture the pairing session data.

Apple's Bluetooth keyboard, for example, has a pretty complex passphrase that is unique to each device. The trackpad, magic mouse and keyboard all use the same Broadcom bluetooth chip as well.

To paraphrase, the level of protection depends on the length and uniqueness of your device's passphrase, and how often you change it (which only happens when you re-pair a keyboard, for instance, not sure if it even changes then for the trackpad).

For details see how secure is Bluetooth encryption? (though beware, it's from 2004); also Which wireless keyboard is most secure? has some interesting reading, but doesn't really focus on BT security.