Two Monetary Policies Diverge in the Woods

The Canadian dollar took a sharp tumble on the contrast between the Bank of Canada’s rate cut and Yellen’s confirmation that the Fed is still on track to hike rates later this year. 

The Bank of Canada cut its overnight rate 25 bp to 0.5%, the second cut this year.  It cited the impact of the drop in oil prices and the failure to non-energy exports to pick-up the slack. 

The Canadian dollar took a sharp tumble on the contrast between the Bank of Canada’s rate cut and Yellen’s confirmation that the Fed is still on track to hike rates later this year. 

The Bank of Canada cut its overnight rate 25 bp to 0.5%, the second cut this year.  It cited the impact of the drop in oil prices and the failure to non-energy exports to pick-up the slack. 

After contracting in Q1 and April, the Canadian economy expects to contract in H1.  The central bank cut this year’s GDP forecast to 1.1% from 1.9% it made in April.  The fact that the Bank noted that the output gap is significantly larger than previously understood is a dovish admission.  It means that the central bank may still have an easing bias, though many, including us, suspect this is the last cut in the cycle.

The US dollar shot through its barrier around CAD1.28 to reach almost CAD1.2930.  These are new multi-year highs for the greenback.  It is difficult to speak of resistance when the levels have not been in seven years.  Some talk about a test on CAD1.3000-30.  A break of CAD1.2880 would signal an intra-day high is in place.  The markets await Poloz’s comments before the longs want to take profits. 

The New Zealand dollar is also trading at new multi-year lows following the disappointing milk auction.  The RBNZ meets on July 23.  The market fully anticipates a 25 bp cut then.  It is debating another move.  The Kiwi and Canada are competing, as it were, for the big loss on the day.  Both are down around 1.3%.  The next target for the Kiwi comes in near $0.6575.