USD / CAD – Canadian Dollar depressed ahead of BoC

– Bank of Canada widely expected to announce 25 bp rate cut today.

– Risk sentiment is mixed ahead of upcoming ECB meeting and US nonfarm payrolls.

– US dollar trading defensively but little changed since Tuesday close.

USDCAD: open 1.3685, overnight range 1.3666-1.3691, close 1.3679, WTI $73.22, Gold, $2332.39.

The Canadian dollar is drifting lower into the 10:00 am Bank of Canada monetary policy announcement. The central bank is expected to lower its benchmark overnight rate by 25 bps to 4.75%, from 5.00% where it has sat since July 12, 2023. It is not a unanimous view but the market odds for such a move are 83%, a sizeable jump from the 60% seen just three weeks ago.

There are many reasons supporting a rate cut. BoC policymakers have repeatedly said that interest rate direction was data dependent, and the latest slew of economic reports shows stagnant economic growth, an easing employment market, and falling inflation. More importantly, Governor Tiff Macklem virtually preannounced a rate cut during his press conference after the April 10 meeting. The only reason for delaying a rate cut until July is because that is when the latest BoC Business Outlook Survey and Monetary Policy Report data would be available.

The Canadian dollar is likely to drop following a rate cut announcement, but the tone of the statement will determine whether the decline is sustainable.

Elsewhere, the focus will be on the May ADP Employment change data which is expected to show the US added 173,000 jobs, down from 192,000 in April. The ISM Services PMI is expected to be unchanged from April at 54.8.

EURUSD drifted in a 1.0865-1.0886 band. A spate of Eurozone data, including German Services PMI (actual 54.2), Eurozone Services PMI (actual 53.2) and Eurozone PPI failed to spark any interest.

GBPUSD traded in a 1.2764-1.2784 range with prices underpinned by higher than forecast UK Services PMI which rose to 53 from 52.8 in April.

USDJPY soared from yesterday’s low of 154.55 to 156.31 just before NY opened due to carry trades being unwound on the lower US interest rate outlook . However gains were capped by Bank of Japan intervention concerns and by the risk of a BoJ rate hike. Japan’s Service PMI rose to 53.8 from 53.6

AUDUSD traded negatively in a 0.6639-0.6665 range with prices weighed down by slightly weaker than expected Q1 GDP (actual 0.1% q/q compared to the forecast of 0.2%, and previous 0.3%.

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