Jun 06, 2024

Following the Bank of Canada’s decision to lower interest rates, Canadian stocks and bonds surged Wednesday. This rate cut, the first among G7 nations, instilled optimism for the Canadian economy. Notably, after this development, the Canadian dollar (loonie) reached a near-two-week low against the US dollar.

USDCAD - 4-Hour Chart

USDCAD – 4-Hour Chart

The S&P/TSX composite index on the Toronto Stock Exchange rose by 166.84 points (0.8%) to 22,145.02, recovering most of its losses incurred earlier in the week.

The Bank of Canada reduced its benchmark interest rate by 25 basis points to 4.75%, initiating its first rate cut in four years to alleviate pressure on highly indebted consumers.

Angelo Kourkafas, a senior investment strategist at Edward Jones in St. Louis, Missouri, highlighted the positive impact of this rate cut on equity markets and bonds. He emphasised the Bank of Canada’s willingness to start normalising policy while maintaining economic growth, consistent with a soft landing scenario.

The Canadian services economy experienced growth in May for the first time in a year. S&P Global data indicated an increase in new business and a faster pace of hiring.

As commodity prices rose, all major sectors of the Toronto market, including the interest rate-sensitive real estate and resource stock sectors, experienced gains.

Wall Street also witnessed a rally, primarily driven by technology shares.

Reflecting market expectations of further rate cuts by the Bank of Canada, the Canadian 2-year yield decreased by up to 12.7 basis points to 3.929%—its lowest level since February 1.

Swap market data projects 77 basis points in rate cuts by the Bank of Canada this year, compared to 49 basis points of easing anticipated for the Federal Reserve.

The prospect of divergence in interest rates between Canada and the US weighed on the Canadian dollar, trading 0.1% lower at 1.3690 to the US dollar (or 73.05 US cents). This movement followed the loonie’s intraday low of 1.3741, its weakest level since May 23.

Analysts predict that the Bank of Canada may implement at least one more rate cut before the next Federal Reserve meeting on September 18, increasing the potential for broader rate differentials and currency vulnerability for the Canadian dollar.

The Federal Reserve’s upcoming policy meetings are scheduled for June 11-12 (when rates are widely expected to remain unchanged) and late July, followed by the September 17-18 meeting.

Based on a Reuters poll, most forecasters anticipate the Fed will reduce its key interest rate in September, followed by another cut later in the year.

A Reuters poll indicates that the Canadian dollar’s appreciation over the coming year is projected to be more modest than previously anticipated due to the Bank of Canada leading the Federal Reserve in rate cuts and the potential impact of the US election in November on global trade uncertainty.

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