The recent decision by the Bank of Canada (BoC) to cut interest rates by 25 basis points had a minimal and brief impact on the Canadian dollar. Analysts from ING suggest that this lackluster response may have been due to market anticipation of a 20 basis point cut prior to the official announcement. The BoC emphasized its data-dependent approach and acknowledged persistent inflation risks, which might have contributed to the limited effect on the foreign exchange market.
ING analysts anticipate that the BoC will implement an additional 75 basis point reduction in the second half of 2024, taking a more dovish stance compared to the market’s expectation of a 50 basis point cut. Despite this, there are concerns about the Canadian dollar’s potential to shift more dovishly given predictions that the U.S. Federal Reserve will not exceed two rate cuts this year. The market consensus indicates caution from the BoC in significantly widening the interest rate differential with the Fed.
Analysts believe that the likelihood of further easing by both the Fed and the BoC is being underestimated by the markets. BoC Governor Tiff Macklem has not ruled out the possibility of a rate cut in July, emphasizing that decisions will be made “one meeting at a time.” While a decline in inflation could prompt an earlier rate cut, it is more likely that the next reduction will occur in September.
In the context of commodity currencies within the G10, the Canadian dollar is considered the least appealing option. Currencies like the Norwegian krone (NOK), Australian dollar (AUD), and New Zealand dollar (NZD) benefit from hawkish central bank stances, deemed more undervalued, and expected to recover more quickly if U.S. interest rates decline this summer.
The firm’s projection for the Federal Reserve suggests that the U.S. dollar may underperform against other currencies during the summer, supporting the hypothesis that the USD/CAD exchange rate could drop below 1.35 in the second half of 2024. This outlook reflects the complex interplay of factors influencing the Canadian dollar’s exchange rate dynamics and the broader foreign exchange market.