The time has come for policy to adjust.” With these eight words spoken on Friday at the Jackson Hole symposium, Fed Chair Powell signaled the end of the Fed’s historic inflation-fighting campaign. The market quickly reacted, with the Dow Jones Industrial Average adding more than 300 points (about 0.8%), and the Nasdaq Composite gaining 1.1%. Treasury yields slipped, and the US Dollar Index weakened to its lowest level since the beginning of the Fed’s rate-hiking cycle.
Unsurprisingly, the USD/CAD pair weakened, closing almost a full cent lower after already falling three cents this month. This essentially guarantees a 25-basis point rate cut at the September 19th Fed meeting, but the intensity and urgency of Powell’s comments have raised the possibility of a 50-basis point cut as well. According to some experts at BMO, in each of the last three Fed cutting cycles, the first cut was 50 basis points, reflecting the Fed’s tendency to favor front-loading easing measures. And with fighting words like, “the cooling in labor market conditions is unmistakable,” from Powell, you could argue that a 50-basis point cut is indeed on the table.
While we don’t expect such a drastic cut in September, the message is clear: the Fed is now officially in rate-cut mode. This gives the Bank of Canada all the cover it needs to be more aggressive in its own rate-cutting cycle. This has two benefits for the Canadian dollar and economy. First, Canada’s export-dependent economy will benefit from a lower interest rate environment, especially if driven by the U.S., our largest trading partner. Second, the potential interest rate differential advantage that the U.S. dollar was enjoying, which allowed it to attract investment flows, is now likely to dissipate.
The Canadian dollar is currently trading at 1.3513 CAD against the US Dollar.
