On Wednesday, Canadian stocks and bonds rallied, and the Canadian dollar hit a near two-week low against the U.S. dollar. This happened because the Bank of Canada became the first central bank in the G7 to cut interest rates, improving the country's economic outlook.
The S&P/TSX Composite Index of the Toronto Stock Exchange rose by 166.84 points, or 0.8%, closing at 22,145.02, recovering most of its losses from earlier in the week.
The Bank of Canada lowered its benchmark interest rate by 25 basis points to 4.75%, marking the first rate cut in four years. This move is expected to alleviate the pressure on heavily indebted consumers.
"This is clearly a positive development for both the stock and bond markets," said Angelo Kourkafas, a senior investment strategist at Edward Jones in St. Louis, Missouri. "It aligns with a soft-landing scenario where the Bank of Canada is willing to start normalizing policy while economic growth remains robust."
Data from S&P Global showed that Canada's services sector economy grew for the first time in May, with an increase in new business and a faster pace of hiring.
All ten major sectors of the Toronto market moved higher, including the interest-rate-sensitive real estate sector and resource stocks, as commodity prices rose.
Wall Street also surged, led by gains in tech stocks.
The yield on Canada's 2-year government bonds fell by up to 12.7 basis points to 3.929%, the lowest level since February 1, as investors bet on further rate cuts by the Bank of Canada in the coming months.
Swap market data indicated that the Bank of Canada is expected to cut rates by a total of 77 basis points this year, while the U.S. Federal Reserve is expected to cut rates by 49 basis points.
The prospect of this interest rate differential has weighed on the Canadian dollar. The loonie fell 0.1% to 1.3690 per U.S. dollar, or 73.05 U.S. cents, after hitting an intraday low of 1.3741, its weakest level since May 23.
"We expect at least one more rate cut by the Bank of Canada before the Fed's meeting on September 18, which will further pressure the loonie due to the widening rate differential," said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
