Everything You Need to Know on Wednesday: Interest Rate Policy in Canada and U.S. Set to Diverge

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,313.10, up 0.38%

● 'A tale of 2 economies': Interest rate policy in Canada and U.S. set to diverge

● National Bank to buy Western Canada rival for US$3.6 billion

● OECD fossil fuels output increases 3.5% YoY in March, IEA reports

● Stocks to watch: Gold Reserve

Today, the Canadian dollar is trading at 72.58 cents US, a slight decrease from Tuesday.

S&P/TSX 60 Index Standard Futures are trading at 1,313.10, up 0.38% from previous close.

With monetary policy at the Bank of Canada and U.S. Federal Reserve on track to diverge, experts say it could set the Canadian dollar up for volatility down the road.

If the Bank of Canada’s rate falls too far below the Fed’s, it could negatively affect the loonie, said Allan Small, senior investment adviser at IA Private Wealth. This would make imports from the U.S. — Canada's biggest trading partner — more expensive and put upward pressure on inflation, though he added this isn’t something that happens overnight.

“If the Bank of Canada cuts a few times and the Fed stands pat, I don't think that will be an issue,” he said.

But if the Bank of Canada keeps cutting and the Fed holds on past the first quarter of next year, “then we could start to see significant divergence.”

The Fed is widely expected to hold its key interest rate steady on Wednesday as the country’s economy has been more resilient than expected in the face of higher borrowing costs and inflation.

It’s a different story in Canada, where last week, the Bank of Canada announced its first interest rate cut in more than four years after a steep hiking cycle aimed at tamping down inflation.

At a June 5 press conference discussing the rate cut, governor Tiff Macklem said the central bank has more confidence that inflation is heading toward its two per cent target.

He acknowledged there are limits to how far the Bank of Canada can diverge from the U.S. in terms of rate policy, but he said “we’re not close to those limits.”

The Bank of Canada cut its key lending rate by a quarter of a percentage point to 4.75 per cent while the U.S. federal funds rate currently sits at 5.25 per cent to 5.50 per cent.

OECD production of fossil fuels - crude oil, natural gas liquids and refinery feedstocks - rose 3.5% year over year in March, the International Energy Agency said in its monthly oil statistics report released on Wednesday.

Refinery gross output of total production also edged higher by 0.9%. Net deliveries of total products increased by 3%.

Oil stock levels on national territory grew by 1.4 million metric tons in March compared to the closing stock levels in February, closing at 466.2 million metric tons.

Montreal-based National will pay the equivalent of $52.24 a share for CWB, a premium of 110 per cent over the target’s closing price on Tuesday. The deal requires the approval of two-thirds of CWB’s shareholders and the Canadian government and is expected to close by the end of 2025.

For National Bank, Canada’s sixth-largest lender, the deal represents an opportunity to diversify its earnings away from Quebec, where it’s one of the most dominant financial institutions. Its stability has made it one of Canada’s top-performing banks over the past 12 months, with its stock rising about 21 per cent during that time.

Now National Bank is using the strong valuation on its shares to acquire a weaker rival.

“This transaction is about growth and brings together two great banks with a complementary footprint in personal and commercial banking, and supports our objectives in Western Canada and across the country,” National CEO Laurent Ferreira said in a statement.

National said it has identified $270 million in pretax cost and funding synergies.

Final bids were due on Tuesday as part of a process to sell PDV Holding, which controls Citgo, Venezuela’s most important foreign asset, in an auction to pay off creditors. The sale hearing is scheduled for July 15.

PDV is itself a subsidiary of state-controlled oil giant Petróleos de Venezuela SA, or PDVSA.

Gold Reserve is said to be among a group seeking funding from JPMorgan Chase & Co. in a US$7 billion bid. Gold Reserve’s statement did not disclose the bid’s amount.

Between them, the group is said to have more than $20 billion in judgments against Venezuela for arbitration awards, unpaid debts and defaulted bonds.

As part of the bid, Gold Reserve entered into an indication of interest with FJ Management Inc., which would participate in ownership, collaboration and operational oversight if the bid is successful, according to the statement.