Daily Brief – The BoC follows the Fed

The BoC follows the Fed

At its September decision, the Federal Reserve took the decision to reduce its target benchmark interest rate by 50 basis points. The market had been oscillating between a quarter point and a half point interest rate cut in the weeks moving into the decision. Once the FOMC delivered their September decision, pricing for the Bank of Canada’s (BoC) October decision shifted towards 50 basis points. That is exactly what the BoC delivered yesterday.

Canada started its interest rate cutting cycle much sooner than many other nations. The peak of its post-pandemic inflation rate came far sooner and registered much lower than many of its developed market peers. Pirouetting from the metaphor of landing a plane to the gymnastics floor, the BoC’s governor announced yesterday evening that, “sticking the landing is now the priority”. There was a brief spark lower in the Loonie whilst markets added conviction to expectations of another outsized hike for the December meeting.

On balance, the Canadian Dollar is expected to outperform many of its ‘high beta’ currency peers in the run up to the November election. Risk conditions have been observed to falter as markets hedge against the potential for another Trump term. Global growth would be expected to falter which would hamper this section of the FX market. However, beyond this the prospect of another economically protectionist agenda threatens to create divergences between the winners and losers of a potential Trump presidency. With Canada one of the least-likely losers of a such an administration, CAD could benefit from hedging flows that would penalise EM currencies as well as the likes of NZD and AUD.

Discussion and Analysis by Charles Porter

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