Invesco Canada blog

Insights, commentary and investing expertise

Full steam ahead: Fed hawkish, hikes rates

The U.S. Federal Open Market Committee (Fed) hiked its key interest rate by 0.25% today, to a target range of 1% – 1.25%. While the hike was fully expected by the market, recent inflation prints, such today’s May CPI falling by -0.1%, had left an expectation this would be a dovish hike. As it turns out, the Fed announcement was hawkish as it formally announced the details of their balance sheet normalization.

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Will U.K. election surprise lead to “softer” Brexit?

One year after the Brexit referendum and two years after the Scottish independence referendum, U.K. voters have surprised the country and the markets once again, with a dramatically different election outcome than suggested by almost every poll: Instead of an enlarged Conservative Party majority, which Prime Minister (PM) Theresa May wanted to see, the result of the June 8 general election is a “hung parliament” – no party controls a majority.

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Interest-rate outlook: Excess pessimism in U.K.

During the recent rate rally, the Canadian 10-year government bond yield held at 1.45% and has bounced slightly from there, but still remains at the lower end of its recent range.1 Economic data has tapered off from the strong rebound seen in the first quarter and the Bank of Canada continues to keep monetary policy on hold. The U.S.’s recently imposed tariffs on Canadian softwood exports raised concerns about broader trade implications. In addition, a Canadian subprime mortgage lender has experienced a liquidity drain, drawing attention to an area of the mortgage market that is not typically in the news. We would expect Canadian yields to remain supported in any sell-off.

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Currency outlook: Continued CAD volatility

The Canadian dollar weakened significantly in April, breaking out of its one-year range. A combination of factors contributed to the weakness. Higher U.S. oil production and lower oil prices have put pressure on the Canadian currency. The announcement of U.S. tariffs on Canadian softwood exports has also been a factor. Third, the recent liquidity problems of a Canadian subprime mortgage lender have played a role. Despite the recent strength in the latter half of May, we believe weakness in the Canadian dollar is likely to continue.

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Interest-rate outlook: Impact of upcoming British election

The yield on the 10-year Canadian government bond broke through its recent range of 1.60%-1.87%, reaching a low of 1.43% on April 18.1 Geopolitical risks, as well as concerns about elections in France were the big driver as the economic data in Canada has been fairly positive.

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Currency outlook: Global growth, eurozone elections continue

Canadian dollar strength has faded recently despite stronger economic data. Weakness in oil prices has been responsible for some of the reversal. The Bank of Canada has, at least temporarily, dropped its dovish tilt, but appears content to leave the overnight rate target at 0.50% for the foreseeable future.1 The Canadian dollar continues to remain overvalued, in our view.

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