Will the Canadian dollar's reaction to BOC cuts reveal future U.S. economic trends and market direction?
Will the Canadian dollar's reaction to BOC cuts reveal future U.S. economic trends and market direction?
By:Ilya Spivak
Whether it rises or falls after the BOC announcement may be a warning of trouble ahead or a nod to prosperity
- The BOC is expected issue a double-sized interest rate cut at this week’s policy meeting.
- Canada’s economy is struggling, diverging from a historic link with a robust U.S.
- How the Canadian dollar responds may help shape a view of what’s ahead for U.S. growth.
The Bank of Canada (BOC) is expected to deliver the equivalent of three 25-basis-point (bps) rate cuts over its remaining two meetings in 2024. That breaks down to 50bps priced in for this week’s rate decision, followed by 25bps more in December. The outsized move follows a sharp drop in inflation amid an ongoing economic slump.
The headline consumer price index (CPI) measure of price growth fell to 1.6% year-on-year in September, the lowest since February 2021. Meanwhile, the latest purchasing managers index (PMI) data from S&P Global showed that economic activity shrank for a fourth consecutive month in September. The pace of contraction accelerated to boot.
Canada’s economy is struggling, even as the U.S. thrives
This stands in stark contrast to what’s happening south of Canada’s border in the United States. Analog purchasing managers’ index (PMI) data shows the pace of economic activity growth jumped to a 12-month high in May and has hovered within a hair of that level for the subsequent four months.
The critical difference-maker seems to be the service sector, which is driving growth in the U.S., while manufacturing is struggling. The tables turn in Canada. Its services firms depend on domestic demand, which is anemic. Manufacturers enjoyed a U.S. goods-buying spree amid the COVID-19 outbreak, but that has stalled.
Canadian consumers’ appetites are cool because interest rate hikes to combat post-pandemic inflation hit them relatively harder. At nearly 102%, their household debt levels as a share of gross domestic product (GDP) are higher than in the U.S., the Eurozone, the U.K. and Japan.
Meanwhile, Canada’s government is stingier with offsetting fiscal policy. Its debt to gross domestic product (GDP) ratio fell to 104% in 2023, according to an estimate from the International Monetary Fund (IMF). That would be a fourth year of decline from a peak of 118% in 2020. By contrast, the ratio was down to 122% in the U.S. last year, from 126% three years before.
U.S. and Canada: Who will lead? Who will follow?
With that in mind, traders will be keen to see the BOC’s updated economic forecasts to gauge which way the two economies might recouple. U.S. strength may begin to spill over into Canada again as demand for goods rebounds closer to historical norms. It now appears to lag services by the most in nearly two decades.
On the other hand, Canada might make for a cautionary tale. The U.S. is yet to experience the brunt of the rate hike cycle. In fact, its firms have spent less—not more—on credit costs even as the Federal Reserve has hiked rates, cushioned by cheap money stored up during the pandemic. A jump in refinancing rates on this debt is fast-approaching.
The Canadian dollar may help decipher which way the markets lean after the BOC announcement. If it drops despite an already dovish outlook, that might speak to a grim view of external demand, which could be a warning about what awaits the U.S. downwind. Alternatively, a rise may be a nod to the return of joint prosperity.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.