The Canadian dollar soared against the greenback on Friday after the US Federal Reserve cut the rate at which it lends banks money and warned that risks to economic growth had increased "appreciably".
Canadian bond prices were higher on the short end, but slightly lower on the long end as the likelihood for a Fed interest rate cut at its September policy meeting increased.
The Canadian dollar ended at C$1.0614 to the US dollar, or 94.21 US cents, up from C$1.0753 to the US dollar, or 92.99 US cents, at Thursday's close. It leaped as high as C$1.0555 to the US dollar, or 94.74 US cents, after the Fed cut. The Fed cut its discount rate, which governs direct loans from the central bank to commercial banks, by 50 basis points, to 5.75 percent. The move added more liquidity to the financial system and it added some stability to the volatile equities markets.
That, in turn, helped the Canadian dollar. "Canada has been a star performer today," said Jack Spitz, director of foreign exchange at National Bank Financial. "The flows in currencyland are by-and-large being influenced by the equity markets and the aversion of risk tolerance that seems to creep in." Spitz said the strong performance of the Canadian dollar on Friday suggests that as long as the equities market continues to stay fairly steady, the Canadian dollar should probe higher, towards C$1.05 to the US dollar.
The Bank of Canada declined to comment on the Fed rate cut. "We do not comment on actions of other central banks," spokesman Jeremy Harrison said. "We are monitoring financial market developments closely, and any additional announcement will be made public through the bank's Web site."
Looking ahead to economic data, Tuesday will be busy, with the composite leading indicator for July, and retail trade data for June, but consumer price index data for July, also on Tuesday, will be the star attraction.
"I think (Bank of Canada Governor David) Dodge really sees himself as an inflation fighter and I think the numbers that come out from a core inflationary standpoint will go a long way in appraising whether or not the Bank of Canada is prepared to move into a hike or a cut or stability," said National Bank Financial's Spitz. Canadian bond prices were mostly higher, with long-term bonds lagging, mirroring the larger US treasuries market, as investors priced in an interest rate cut by the Fed in September.
Short-term bonds are much more volatile than long-term bonds when there has been a change in overnight interest rate expectations. The two-year bond added 12 Canadian cents to C$99.25 to yield 4.188 percent, while the 10-year bond gained 23 Canadian cents to C$96.76 to yield 4.411 percent.
The yield spread between the two-year and 10-year bond moved to 22.3 basis points from 17.2 at the previous close. The 30-year bond fell 28 Canadian cents to C$109.05 to yield 4.448 percent. In the United States, the 30-year treasury yielded 4.985 percent. The three-month when-issued T-bill yielded 4.23 percent, down from 4.32 percent at the previous close.
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