Investing.com – The Bank of Canada (BoC) on Wednesday cut interest rates by 25 basis points. The impact on the Canadian dollar was minimal and brief, which ING analysts attribute to market expectations of a 20 basis point cut before the announcement. The Bank of Canada emphasized its data-driven approach and acknowledged persistent inflation risks, which may have contributed to the limited impact on foreign exchange.
ING expects an additional 75 basis point cut by the Bank of Canada in the second half of 2024, a more pessimistic stance compared to market expectations of a 50 basis point cut. The likelihood of a more pessimistic shift in the Canadian dollar curve is diminished by expectations that the US Federal Reserve will not implement more than two interest rate cuts this year. Market consensus suggests that the Bank of Canada is cautious about significantly increasing its interest rate differential with the Federal Reserve.
However, analysts believe the likelihood of further easing by the Fed and the Bank of Canada's willingness to act independently is being underestimated by markets. Bank of Canada Governor Tiff Macklem did not rule out the possibility of a rate cut in July, noting that decisions would be made “one meeting at a time.” Lower inflation could lead to an earlier rate cut, although September is considered more likely for the next cut.
In the context of G10 commodity currencies, the Canadian dollar is seen as the least attractive option. Currencies such as the Norwegian Krone (NOK), Australian Dollar (AUD), and New Zealand Dollar (NZD) benefit from hawkish central bank stances, are considered undervalued, and are expected to recover more quickly if US interest rates fall this summer.
Regarding the exchange rate, the company's forecasts for the Federal Reserve indicate that the US dollar may underperform against other currencies during the summer, supporting the hypothesis that the US dollar/CAD may fall below 1.35 in the second half of 2024.
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