Canadian Dollar and Yields Tumble as Traders Anticipate BOC's Big Move
Friday, Dec 6, 2024 12:35 pm ET
The Canadian dollar, affectionately known as the "loonie," and Canadian bond yields have taken a tumble as traders bet on a significant rate cut by the Bank of Canada (BOC) in the coming weeks. The soft consumer price index (CPI) report and an unexpected rise in the unemployment rate have fueled speculation that the BOC will cut interest rates by more than expected, driving the loonie to its lowest level in two years and sending government bond yields plunging.

The Canadian dollar fell as much as 0.3% against the US dollar to the day's low around $1.3839 after the release of the CPI figures, before paring the move later in the session. This move is driven by the BOC's policy rate path relative to other Group-of-10 peers, as the central bank was among the first to begin easing borrowing costs this cycle. The report showed inflation in September growing at the smallest annual pace in more than three years and below the BOC's 2% target, raising the likelihood of a more aggressive rate cut.
Meanwhile, Canadian debt rallied across the curve, with government bond yields falling eight basis points to 2.942% following the jobs report. Traders in overnight swaps boosted the odds of a 50 basis-point cut at the BOC's decision next week at more than three-quarters, from about a coin flip previously. This significant move is driven by the combination of soft inflation data, a rise in unemployment rate, and the BOC's dovish stance relative to other G10 peers.

The Canadian dollar has slumped since reaching a six-month high against the US dollar in late September as traders assess the BOC's policy rate path relative to other G10 peers. The central bank was among the first to begin easing borrowing costs this cycle in June, followed by the US Federal Reserve in September. This relative dovishness, combined with soft economic data, has amped up bets that the BOC will ease borrowing costs by a quicker pace. Market pricing now suggests some 45 basis points worth of interest-rate cuts at the BOC's meeting on Oct. 23, up from around 39 basis points on Monday.
The BOC's upcoming decision on Oct. 23 will be closely watched by investors and traders alike, as the central bank's policy stance will have a significant impact on the loonie's exchange rate and Canadian bond yields. As the market anticipates a large rate cut, the loonie is expected to continue its downward trend, and government bond yields may further decrease. However, the ultimate outcome will depend on the BOC's assessment of the economy and its commitment to supporting growth while maintaining inflation within its target range.
As the world's attention shifts towards the BOC's decision, investors and traders must remain vigilant in monitoring the loonie's exchange rate and Canadian bond yields, as any significant changes in the central bank's policy stance could have far-reaching implications for the Canadian economy and financial markets.