Inavesting.com – The Canadian dollar has underperformed compared to other pro-cyclical currencies since the beginning of May, dragged down by its correlation to US economic data and interest rate expectations from the Federal Reserve. Market analysts expect a 25 basis point interest rate cut by the Bank of Canada in June, a position that has been maintained for several months. This expected policy action is expected to reduce the attractiveness of the Canadian dollar compared to other commodity-linked currencies.
The proximity of inflation to the target was the main argument supporting a possible interest rate cut in June. However, the rise in job creation in Canada in April defied cautious expectations. The release of April Consumer Price Index (CPI) data in Canada today is crucial, as it may impact market expectations regarding the June interest rate decision. Analysts are particularly interested in whether the core CPI “pruning” measure will fall in line with the Bank of Canada’s other preferred core inflation indicator, the “average,” which falls below 3%. If all key inflation measures, both core and headline, are within the 1-3% target range, this could complicate the Bank of Canada's rationale for maintaining a tight monetary policy.
The market appears to be discounting the likelihood of a rate cut in June, pricing in a revision of just 11 basis points. There is also speculation that the Canadian dollar may weaken further as a potential interest rate cut becomes more fully anticipated by the market, leading to increased dovish positions on the Canadian interest rate curve. If inflation declines as expected according to today's data, the pair may approach the 1.3700 level again in the near term. Currency pairs such as and can also reflect policy divergence more clearly.
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