What A Difference A Week ( Doesn’t ) Make

A week ago, the only thing people wanted to talk about was the BOC rate cut. Then, on Wednesday and Thursday, all people wanted to talk about is how the 5 year bond and the CAD currency.

Interestingly enough, even though the BOC cut the overnight rate last week, the 5 year Canadian bond is higher than where it was before the announcement. On June 4 the bond yield was 3.509%, and as of this morning, we are at 3.53%.

This was my thesis before the rate cut, whereby if the overnight rate did indeed drop, it isn’t good news, and rather bad news, and it means the economy may be in trouble. Investors in Canadian government debt are not willing to take lower rates for the perceived risk they are taking. This could start to back Tiff and Co into a corner – if they continue to cut it will reinforce the message the economy is weak, and could drive fixed rates higher.

And of course, the Canadian dollar is lower since the announcement. Not overwhelmingly lower, but lower none the less. Heading to the BOC announcement the CAD was right around .7304, and this morning we are down to around .7260. A little more than 40 bps lower.

However, remember that currency markets start to price in problems well in advance of things like BOC announcements. Back around late Dec 2023 / early Jan 2024, the CAD was sitting at .7572. A chart of the CAD vs. USD shows a very consistent line line from the upper left towards the lower right.

Basically, the BOC announcement last week amounted to a nothing burger in terms of bond yields and currency markets. The trends that were in place before remain in place now. Sure, variable rate debt holders saw a bit of relief, but probably not enough to amount to anything. Basically the BOC removed a straw from the camel’s back. Hopefully there aren’t others in line waiting to put more straws on……