BoC Expects To Reduce Stimulus, Dollar and Yen Could Weaken Again

Following its June policy meeting, the BoC indicated in the past week that its benchmark rate will remain at 0.25 percent, as expected. The BoC chose to keep the weekly net asset purchases of the government of Canada bonds at C$3 billion.

Indeed, the Canadian economy is recovering by predictions, implying that the central bank’s April GDP growth forecasts should be generally maintained. Despite the spring viral outbreak, there is the expectation of a 3.5 percent increase in Q2 GDP, which is in line with the Bank of Canada’s most recent forecast. As planned, vaccine distribution has quickened, and early indications suggest that household spending in the hard-hit travel and hospitality sectors picked up in June as restrictions were removed.

According to the most recent data released by Statistics Canada on Friday, the Canadian economy added 230,700 jobs in June, compared to 68,000 job losses reported in May and estimates of +195,000. Meanwhile, Canada’s unemployment rate fell to 7.8% in June from 8.2% in May, falling short of expectations of 7.7%.

Also with the economy operating as projected, the expectation is for the BoC to slow its asset purchases this month. With a near-term recovery appearing increasingly certain, the question now is whether a consumer-led spike in demand in the second half of 2021 will exacerbate inflationary pressures. Rising housing expenses, as well as a reversal of price cuts earlier in the month (especially for energy prices), boosted headline CPI increase to 3.5 percent in April and May, compared to year-ago levels.

The Dollar and Yen Could Weaken Again

The atmosphere in the market improved ahead of the weekly close, with the dollar falling against most of its major counterparts. The best performer was the pound, while the poorest performer was the yen. After issuing yet another state of emergency for Tokyo over the weekend, Japan’s top government spokesperson said the country is ready to pour more money into the economy to cushion the pain of a prolonged pandemic.

Last week, market bears had several opportunities to test a negative turnaround, riding on topics such as the Federal Reserve’s tapering, the spread of Delta variations, and China’s crackdown on its technology firms, as well as overseas IPOs. Despite the volatility, the optimists refused to give up and propelled US indexes to new record closes. The tussle should be over in no time.

But, for the time being, it appears that the bulls have the upper hand. This leads many to the observation that, while the Yen and Swiss Franc closed the day as the strongest, the late selloff suggests that the short-term trends are already turning.