The Bank of Canada is widely expected to cut rates by 50bps on Tuesday to 3.00 percent, the lowest target rate since October 2005, as inflation pressures subside, credit markets tighten, and a probable recession in the US threatens the Canadian economy. The most recent CPI report showed that the Bank of Canada’s core measure fell to 1.3 percent, which is the lowest reading since July 2005 and well below the Bank’s 2.0 percent target.
What Are The Markets Facing?
The Bank of Canada is widely expected to cut rates by 50bps on Tuesday to 3.00 percent, the lowest target rate since October 2005, as inflation pressures subside, credit markets tighten, and a probable recession in the US threatens the Canadian economy. The most recent CPI report showed that the Bank of Canada’s core measure fell to 1.3 percent, which is the lowest reading since July 2005 and well below the Bank’s 2.0 percent target. During the March meeting, when the Bank cut rates by 50bps to 3.50 percent, the concurrent press release said that “the balance of risks around its January projection for inflation has clearly shifted to the downside…Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 percent inflation target over the medium term.” Furthermore, recent economic indicators including Ivey PMI, employment data, and wholesale sales have pointed toward some slowing in domestic demand, which will give the Bank of Canada the green light to slash rates.
Bonds – 10-Year Canadian Government Bond Futures
Canadian government bonds have tested the confluence of trendline and Fibonacci support at 117.00/03 as traders pile into equities. While risk trends will remain the primary driver of CGBs going forward, Tuesday’s Bank of Canada meeting could lead the contract to jump toward a zone of resistance near 118.19 - 118.41. On the other hand, if the Bank cuts rates less than expected, CGBs could test 117.00 once again.
FX – USD/CAD
Do you think the USD/CAD will fall below parity? Discuss the topic with other traders in the USD/CAD Forum.
Equities – S&P/TSX Composite Index
[B]
[/B]The S&P/TSX Composite Index continues to surge led by energy stocks, which received a boost from record oil prices, which rose above $116/bbl. However, the threat of another bout of market-wide risk aversion creates substantial downside potential for Canadian equities, and the S&P/TSX may have trouble breaking above trendline resistance at 14,300 in the near-term. On Tuesday, the Bank of Canada’s rate decision could shake up stocks, and bearish rhetoric in the concurrent press release could lead the S&P/TSX to fall down toward the 14,000 level.
Written By Terri Belkas, Currency Analyst at DailyFX.com