The recent decision by the Bank of Canada to cut interest rates by 25 basis points had a minimal and brief impact on the Canadian dollar. Analysts from ING believe that this lackluster response was due to the market already anticipating a 20 basis point cut prior to the official announcement. Despite concerns about inflation risks, the BoC emphasized its data-dependent approach, which may have also played a role in the limited effect on foreign exchange.
ING analysts are predicting an additional 75 basis point reduction by the BoC in the second half of 2024, signaling a more dovish stance compared to the market’s expectation of a 50 basis point cut. While there is potential for a more dovish shift in the Canadian dollar curve, the U.S. Federal Reserve’s projected reluctance to implement more than two rate cuts this year could temper the BoC’s actions. The market consensus suggests that the BoC is cautious about widening the interest rate differential with the Fed, but analysts believe that the markets may be underestimating the likelihood of further easing by both central banks.
BoC Governor Tiff Macklem has not ruled out the possibility of a rate cut in July, emphasizing a cautious and data-driven decision-making process. While a decline in inflation could prompt an earlier rate cut, September is seen as a more probable timing for the next reduction. In the midst of uncertainty, Macklem’s statements indicate a willingness to take decisive action as needed, one meeting at a time.
Within the G10 group of currencies, the Canadian dollar is currently perceived as the least attractive option among commodity currencies. Currencies like the Norwegian krone, Australian dollar, and New Zealand dollar benefit from more hawkish central bank stances, are considered undervalued, and are expected to bounce back quickly if U.S. interest rates decline this summer. This relative lack of appeal for the Canadian dollar may further influence its performance in the coming months.
According to the analysis, the U.S. dollar may underperform against other currencies during the summer, potentially leading to a drop in the USD/CAD exchange rate below 1.35 in the second half of 2024. This projection is based on expectations for the Federal Reserve’s policy stance and its impact on currency markets, suggesting a shifting landscape for the Canadian dollar’s valuation. Investors are advised to stay informed and monitor developments closely.
The Bank of Canada’s recent interest rate cut has sparked discussions and speculations about the Canadian dollar’s future performance. With analysts forecasting further rate reductions and considering global market dynamics, the landscape for the currency is complex and subject to change. As events unfold, investors and traders will need to stay vigilant and adapt to evolving conditions in the foreign exchange market.