Canadian dollar declines amid falling inflation. PBoC kept rates at current levels

The Federal Open Market Committee (FOMC) will hold its Wednesday monetary policy meeting today. The Fed had initially planned to begin cutting rates in March. However, stronger than expected US inflation data (primarily producer inflation – PPI) raised concerns that the central bank may delay an interest rate cut further. As a result, the likelihood of a rate cut was pushed back first to May and then to June. Markets currently estimate the probability of a 25 bps rate cut at the March FOMC meeting at 1%, at the next meeting on May 1 at 9%, and at the June 12 meeting at 59%. The rate is expected to remain at 5.5% at the current meeting, but investors’ main focus will be the press conference. Investors will be paying attention to any clues about the prospects for a central bank rate cut, the strength of the US economy, and the possibility of an inflationary rebound. If Jerome Powell begins to back away from a rate cut this summer, it could put further pressure on the indices.

Semiconductor stocks came under pressure Tuesday after Nvidia (NVDA) unveiled new, more powerful chips for artificial intelligence. As a result, Advanced Micro Devices (AMD) shares fell more than 4%. In addition, shares of Marvell Technology (MRVL) are down more than 3%, and Intel (INTC) is down more than 1%.

Canada’s annual inflation rate slowed to 2.8% in February 2024 from 2.9% in January 2024 and was the lowest since June 2023. This result also contradicts market expectations of 3.1%, giving the Bank of Canada (BoC) more room to start easing monetary policy in the year’s second half. The Canadian dollar fell below 1.36 per dollar, hitting a nearly four-month low.

The ZEW survey of German economic growth expectations rose 11.8 to a two-year high of 31.7, beating expectations of 20.5. The German Economic Sentiment Index (ZEW) gauges the sentiment of institutional investors. It is a key indicator of business conditions. A reading above expectations is seen as positive for the European economy.

ECB Vice President Gindos said, “The ECB hasn’t yet discussed anything about future rate moves. The evolution of wages is key, and in June, we will also have our new projections and be ready to decide when to adjust our policy stance based on the data we see.” Swaps put the odds of a 25 bps ECB rate cut at 6% for the next meeting on April 11 and 82% for the June 6 meeting.

WTI crude prices fell to $82.5 a barrel on Wednesday, retreating slightly from recent highs, as investors closed some of their gains after a strong rally in oil prices ahead of the US Federal Reserve’s decision. Iraq announced plans to cut oil exports to 3.3 million bpd in the coming months to meet its OPEC+ quota, while Saudi Arabia cut crude exports for the second consecutive month. At the same time, economic data from China, including strong industrial production and retail sales figures, reinforced expectations of rising demand from the world’s largest oil importer.

Asian markets were predominantly rising yesterday. Japan’s Nikkei 225 (JP225) ended the day up 0.66%, China’s FTSE China A50 (CHA50) rose by 0.23% on Tuesday, Hong Kong’s Hang Seng (HK50) ended the day down 1.24%, and Australia’s ASX 200 (AU200) was positive 0.36%.

On Wednesday, the People’s Bank of China (PBoC) left the one-year and five-year prime rates unchanged at 3.45% and 3.95% respectively. The one-year LPR is the benchmark for most residential and corporate loans, while the five-year LPR determines most real estate mortgages. Both rates are at record lows as China’s central bank seeks to stimulate an economic turnaround amid adversity in the real estate sector and record-low consumer confidence.