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Equities Continue to Rise; BoC Decision Wednesday

Published July 12, 2016
  • Stocks indices from Tokyo to Paris are in the green this morning with US and Canadian markets set to open higher as well
  • Equities have enjoyed quite the ride the past few weeks, plunging on the 'Brexit' decision before roaring back as the prospect of lower rates for longer fueled risk appetite
  • The US 10-year yield remains near all-time lows and the US yield curve is flattening, a potentially negative sign for the global outlook as a whole…
  • But have no fear – oil, natural gas and copper are also enjoying gains this morning with oil in particular recovering almost 3% from yesterday's two month low to trade back above the $46 handle for WTI
  • The Canadian dollar has benefited from the pop in crude prices and the 'risk-on' atmosphere as is, trades into the low 1.3000's after hitting its worst levels against the greenback since June 2 on Monday
  • Yesterday's price action pointed to the possibility of a larger move higher for the USD against the Loonie but that has yet to fully materialize
  • Ahead of tomorrow's Bank of Canada decision it is important to note that the Loonie has been the second best performer against the USD in the first half of 2016…
  • …however given the exogenous risks to the global outlook as a result of Britain's decision to leave the EU, this may change in the second half
  • Domestically, the Canadian economy has been struggling with a mere 108K jobs created this year and the vast majority of those have been part-time positions
  • The export led recovery that the Bank of Canada has been hoping for has not materialized despite a weak Loonie and a resilient US economy
  • Oil prices remain depressed, stifling investment and innovation in the resource sector
  • As a result, economists widely expect rates to be on hold until late 2017 and perhaps even longer
  • Base case for Wednesday's decision is for rates to be left at 0.5% with slight downward revisions to the economic outlook… 
  • …however a dovish shift in the language employed by Governor Poloz, or larger than expected downward revisions to the growth outlook, could trigger a more pronounced round of Loonie weakness

Chart: USDCAD sideways consolidation continues. USD trying to break out of a bullish ascending triangle formation.