BOC Cuts Rates

The Bank of Canada became the first central bank in the G7 group to cut rates yesterday. Marking its first rate cut in four years, the BOC noted that it was confident inflation was heading back to the 2% target and signalled that further rate cuts would be likely if CPI continues to move lower. However, BOC governor Macklem warned that there are risks to the outlook, citing global geopolitical tensions, rising house prices and high wage-growth as key risks.

Soft Landing

Looking ahead, Macklem noted that it looks as though the Canadian economy is headed for a soft landing on the back of the post-pandemic tightening. While the BOC governor warned that such an outcome isn’t guaranteed yet, he cited confidence in strong consumption growth, bolstered by recent, positive Q1 growth figures.

BOC/Fed Divergence

One final factor addressed by the bank yesterday was the divergence between it and the Fed. Typically, the two central banks are aligned in monetary policy. Periods when rates have been lower in Canada have typically sent CAD lower, creating inflationary pressure through higher import prices. However, Macklem didn’t appear concerned by this and said while there are limits to how far divergence can run, the BOC was not testing those limits yet.

US Jobs on Watch

Looking at the reaction in CAD which has been fairly muted against USD, suggests that the bigger focus remains on USD for now. With that in mind, tomorrow’s US jobs data will be the key driver for USDCAD near-term.

Technical Views

USDCAD

The rally in USDCAD yesterday stalled into the test of the bear channel highs, with price now trading back around the 1.3685 level which has acted as a magnet for price over recent weeks. While within the bear channel and with momentum studies weak, risks of a drop lower are still seen, putting focus on 1.3501 as the next support to note. 

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