By Fergal Smith
TORONTO (Reuters) – Canadian stocks and bonds rose on Wednesday while the Canadian dollar fell to its lowest in nearly two weeks against the U.S. dollar after the Bank of Canada became the first G7 central bank to cut interest rates and the outlook for the Canadian economy improved.
The Toronto Stock Exchange’s S&P/TSX Composite Index rose 101.63 points, or 0.5 percent, to 22,079.81, recouping losses from the start of the week.
The Bank of Canada cut its benchmark interest rate by 25 basis points to 4.75%, the first cut in four years, easing pressure on highly indebted consumers.
“This is clearly a positive development for the stock and bond markets,” said Angelo Kourkafas, senior investment strategist at Edward Jones in St. Louis, Mo. “The Bank of Canada being willing to start normalizing policy while economic growth is still holding up is consistent with a soft landing scenario.”
Canada’s services economy grew for the first time in a year in May as companies added new business and hired workers at a faster pace, according to data from S&P Global.
In Toronto, rising commodity prices helped lift nine of the 10 major sectors, including the interest-sensitive real estate sector and resource stocks.
Wall Street also rose, led by technology stocks.
Canada’s two-year bond yield fell 11 basis points to 3.946%, the lowest since Feb. 2, as investors bet the Bank of Canada will cut rates further in coming months.
Swaps market data shows the central bank is expected to cut rates by a total of 75 basis points this year, compared with the 47 basis points of easing being priced in by the Federal Reserve.
The prospect of interest rate divergence weighed on the Canadian dollar, which traded down 0.2 percent at $1.37, or 72.99 U.S. cents, after hitting its lowest intraday level since May 23 at 1.3741.
“We expect the Bank of Canada to cut rates at least one more time ahead of the Fed meeting on Sept. 18, making the Canadian dollar vulnerable to a further widening of interest rate differentials,” said Simon Harvey, head of currency analysis at Monex Europe and Monex Canada.
The Federal Reserve’s next policy meeting is on June 11-12 and is widely expected to keep interest rates on hold. The Fed is scheduled to meet again in late July and then on September 17-18.
A majority of forecasters in a Reuters poll expect the Fed to cut its key interest rate in September, followed by one further cut this year.
The Canadian dollar is likely to strengthen more slowly than expected over the next 12 months with the Bank of Canada cutting interest rates ahead of the Fed and the U.S. presidential election in November increasing uncertainty over global trade, according to a Reuters poll.
(Reporting by Fergal Smith, Sreeraji Kaluvilla and Leslie Adler Editing by
