Yesterday was a quiet day in the FX markets, with no significant economic data or political events. The standout movement was the strength of the Japanese yen. The GBP/JPY and EUR/JPY pairs both dropped by around 1%, and the USD/JPY pair fell by 0.7%. After reaching multi-decade highs just a few weeks ago, the yen is benefiting from the unwinding of carry trades and speculation that the Bank of Japan will raise interest rates a couple of times this year.
Turning to central banks, investors are keenly anticipating the Bank of Canada's (BoC) interest rate decision today. It is expected to implement a consecutive 25 basis point cut, positioning it as the most dovish among advanced central banks. The BoC, like many others, is operating in a data-dependent mode. Factors such as subdued economic growth, easing employment pressures, and lower inflation are the key criteria for consecutive rate cuts, but the decision may not be straightforward. On one hand, a lower-than-expected headline inflation and expectations of further favorable news in the near term support more cuts. On the other hand, the disinflation process is no longer broadening, and measures of services and core inflation are showing signs of persistence.
The anticipated rate cut in Q3 has been priced in for some time, and speculative positioning remains heavily bearish on the CAD, indicating crowded trades. Unless there is a significant slowdown in economic momentum or the Governing Council provides additional guidance for near-term easing beyond current market expectations, the impact on the CAD should be limited.
