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The Bank of Canada increases its bets on future rate cuts, and the Canadian dollar may become more vulnerable!

2024-07-26

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The Bank of Canada cut its benchmark interest rate for the second month in a row, cutting it by 25 basis points to 4.50%. The central bank said the weight of downside risks to inflation is increasing in its deliberations.

Analysts say the Bank of Canada is shifting its focus to boosting the economy rather than curbing inflation, raising the possibility of further rate cuts in the coming months.

Investors see about a 60% chance that the Bank of Canada will ease policy again at its next policy meeting in September. Investors expect a total of another 44 basis points of rate cuts by the end of the year, which would mean a policy rate 6 basis points lower than previously expected. The Bank of Canada's next decision will be held on September 5.

A faster pace of rate cuts would ease pressure on indebted Canadian households. It could also add pressure on the Canadian dollar. The Canadian dollar weakened on Thursday, with the U.S. dollar rising to a three-month high of 1.3848 against the Canadian dollar, and remained volatile at high levels into Friday.

"The Bank of Canada's shift in focus from the already victorious fight against inflation to more necessary economic support speaks to a reversal of policy," said Philip Petursson, chief investment strategist at IG Wealth Management.

Canada's GDP growth in recent quarters has been below the Bank of Canada's estimated trend rate of 2.25%, with growth in the first quarter coming in at 1.7%.

Slower GDP growth has led to an oversupply in the economy and a cooling of inflation, which was 2.7% in June. However, inflation could slow more than the central bank expects if the economy is too weak.

While high interest rates haven't pushed Canada into recession, economists say growth has been driven primarily by a big increase in population.

Macklem said Wednesday that the bank is watching not only overall economic growth but also per capita GDP, which has fallen for four straight quarters.

"The Bank of Canada is as dovish as it can be," Jason Daw and Simon Deeley, strategists at RBC Dominion Securities Inc, said in a report.

"With only one inflation report before the next meeting, the bar for the central bank not to cut rates is very high," the two strategists said.

Charu Chanana, head of foreign exchange strategy at Saxo Bank, believes that the widening spread between the Bank of Canada and the Federal Reserve could make the Canadian dollar more vulnerable. However, upcoming U.S. political developments and market expectations of the Fed's actions could also affect the performance of the Canadian dollar.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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The Bank of Canada increases its bets on future rate cuts, and the Canadian dollar may become more vulnerable!

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