As we discussed in our previous post, the market perceived the Fed’s recent comments as less hawkish, implying a reduced likelihood of further tightening. This interpretation suggests that the Fed might be unofficially shifting towards a more dovish stance, favoring the maintenance of current rates. This perception has rejuvenated risk assets, including global equity markets and the Canadian dollar. In essence, stable interest rates imply that long-term bond yields will decrease, making riskier assets a more attractive investment opportunity.
The Canadian dollar has particularly benefited from this renewed market optimism. Investors seem to be moving away from US dollar-denominated Treasuries, favoring risk-sensitive currencies like the Canadian dollar.
Friday’s employment report further underscored the impact of the historic interest rate tightening on the US economy. Hiring in the US notably decelerated in October, with the addition of only 150K jobs, a stark contrast to the anticipated 297K. This could provide compelling evidence the Fed has been seeking to finally end its current cycle of rate hikes.
Should interest rates in the US remain stable, the interest rate differential between the Bank of Canada and the Fed won’t widen. This removes a significant incentive for offloading the CAD dollar in preference for US dollars.
The Canadian dollar is currently trading at 1.3693 CAD against the US Dollar.
