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Daily Market Commentary

A rare rally in the bond markets yesterday was strongest in the morning when it was looking like the equity market would be shaky on the open.  Of course, the equities stabilized and bonds gave up some of their gains.  The Canada tens went down two bps.  Not a heck of a lot considering the 50 bps they've added since March.  Today some mild selling continues, despite a lack of data and Bernanke hinting towards ebbing inflation and continued troubles in the housing market.  According to the Fed, sub-prime (and now "near" prime) lending is still an issue and a pose a threat to the overall economy.  He continues to target tighter lending practices, and not higher rates as a remedy for this problem.  Full report of Bernanke's statements are included in the Daily FI Snapshot.

 

  The inversion of the yield curve from 10's to 30's is the really confusing part of the Canadian market.  The outperformance of the 30's has been nothing short of amazing, given the Bank of Canada talking hawkish on inflation. 

 

Speaking of amazing markets, the CAD$ is holding onto its gains trading around 94.50 cents, as Bernanke softened his tone (albeit very slightly) in statements this morning.

 

There have been three similar rallies in the CAD$ over the past five years (see chart in Daily FI snapshot), each one of which has the seen the CAD$ appreciated by about a dime over a 4-5 month period.  This time, we have approached a dime appreciation in about three months, making this rally look overbought.  That said, conditions are still bullish for the CAD$.  Our overnight rate expectations are firmly to the upside (even the notoriously bearish David Wolfe of Merrill expects the BoC to hike in July), foreign buyouts continue, Oil remains strong, and the US$ remains weak.

 

 



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