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6 June 2024 | FXGT.com

USD/CAD Reacts to BoC Rate Cut and Strong US ISM Services PMI

BoC Cuts Rates: The Bank of Canada (BoC) lowered its policy interest rate by 25 basis points to 4.75% at its June meeting, mentioning improved confidence that inflation is trending lower. This is the first rate cut since March 2020 and reflects a cautious approach to addressing current economic conditions.

Canada Economic Data: The decision to cut rates was influenced by rising unemployment and low GDP growth despite a Q1 improvement, highlighting the combination of low growth and inflation with rising unemployment.

Governor Macklem’s Remarks: Governor Tiff Macklem emphasized the BoC’s cautious approach, noting that further rate cuts would be gradual if inflation continues to ease. He acknowledged that the Canadian economy is likely to experience a soft landing despite high mortgage costs and stressed the limits of diverging too far from the Federal Reserve’s policies.

Interest Rate Differential: The cut widens the interest rate differential between the BoC and the US Federal Reserve, whose key interest rate stands at 5.0%-5.25%. This higher interest rate in the US attracts foreign capital, benefiting the US Dollar and supporting USD/CAD.

Canadian Dollar Reaction: Following the rate cut, the Canadian dollar weakened against most major currencies, particularly in the USD/CAD pair, which rose after the decision. This move was further supported by stronger-than-expected US ISM services PMI data, which boosted the US dollar. However, since the announcement, the pair has retreated, with the Canadian dollar supported by a recovery in oil prices, which extended their gains for the second session.

US Economic Data: The U.S. dollar rose on Wednesday after the Institute for Supply Management (ISM) reported a rebound in the services sector for May, reflecting US economic strength versus Canadian challenges. The ISM Services PMI rise to 53.8 in May from 49.4 in April, surpassing the forecast of 50.8. This contrasted with the ISM Manufacturing PMI released on Monday, that indicated a manufacturing contraction. The services sector’s resilience highlights mixed economic signals in the US.

Upcoming Labour Market Data: Investors are now turning their focus to both Canadian and US labour market data to be released on Friday. The US Nonfarm Payrolls (NFP) report for May is expected to show an increase of 185,000 new employees, up from the previous 175,000. The US employment data will be crucial in shaping US rate cut expectations.

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