Monday Market Minute | Jul 15, 2019

BoC holds firm as Fed prepares to cut — divergence emerges

What Moved

The Bank of Canada held its overnight rate at 1.75% on July 10, while the Federal Reserve was widely expected to cut rates by 25 basis points at its July 31 meeting. A rare policy divergence was forming: Canada holding steady while the US eased. The BoC's Monetary Policy Report upgraded the 2019 GDP forecast to 1.3% (from 1.2%), citing stronger-than-expected housing and consumer spending. Canadian bond yields held above their US equivalents for the first time in months.

Why It Matters

The divergence created an interesting dynamic for Canadian private markets. Higher Canadian rates relative to the US attracted capital flows, supporting the Canadian dollar and improving purchasing power for US-denominated PE commitments. For private credit, Canada's 1.75% rate provided a healthier base yield than the potentially lower US rate, making Canadian credit strategies relatively more attractive to cross-border allocators seeking yield.

Signal to Watch

The Canadian dollar's reaction to the US rate cut would be a key transmission mechanism. A stronger loonie would benefit investors with US-denominated fund commitments but could pressure export-oriented PE portfolio companies reliant on competitive currency.

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