- Bank of Canada cuts 25 bps and suggests further cuts likely.
- Wave of risk aversion washes across global markets.
- US dollar opens higher on safe-haven demand.
USDCAD: open 1.3837, overnight range 1.3803-1.3838, close 1.3809, WTI $76.19, Gold, $2373.40.
If asked to describe the domestic currency market today, the Tragically Hip might sing, “The Canadian dollar is sinking, man, and traders don’t want to swim.” The pressure on the Canadian dollar continues to mount, and the Bank of Canada is playing a role.
The Bank of Canada cut its benchmark rate by 25 bps to 4.5% yesterday in a highly anticipated, well-telegraphed move. Governor Tiff Macklem identified “excess supply” as a key input into the decision, saying, “The economy is in excess supply. There is slack in the labour market, and that is acting to pull inflation down. Our assessment is there's enough excess supply in the economy. The ingredients increasingly are in place to bring inflation back to the 2% target. We don't need more excess supply. We need growth to start picking up, we need job creation to start picking up, to absorb the excess supply in the economy and get inflation sustainably back to target."
In addition, the Governor seemed pretty pleased about the prospects of further decline in inflation rates, noting, “CPI inflation moderated to 2.7% in June after increasing in May, and broad inflationary pressures continued to ease. The Bank’s preferred measures of core inflation have now been below 3% for several months, and the breadth of price increases across components of the CPI is near its historical average.”
At the conclusion of the press conference, analysts immediately penciled in two more rate cuts, with some expecting a third by year-end.
Even so, it was the prospect of further rate cuts that drove the Canadian dollar lower, but falling stock prices globally sparked a risk aversion, safe-haven demand US dollar rally against the majors.
The People’s Bank of China (PBoC) caught markets off guard when they announced a 20 bps cut in the 1-year Medium Term Lending Facility in an effort to spur consumer spending. Global equity traders were unimpressed.
Asian equity indexes closed with steep losses, and European bourses are deep in the red. S&P 500 futures are down 0.11%, and the USD 10-year Treasury yield is 4.23%.
EURUSD traded in a 1.0828-1.0859 band, with gains hampered by weaker-than-expected German Ifo Survey data.
GBPUSD drifted in a 1.2883-1.2917 range, with global risk aversion sentiment weighing on prices.
USDJPY dropped to 151.94 from 153.97 due to safe-haven demand for yen, the risk of a BoJ rate hike, and likely BoJ intervention.
AUDUSD traded in a 0.6521-0.6583 band, with prices depressed by weak commodity prices and China’s economic growth woes.
Today's US data includes Q2 GDP, Durable Goods Orders, and weekly jobless claims.
