Investing.com – The Bank of Canada (BoC) cut interest rates by 25 basis points on Wednesday. The impact on the Canadian dollar was minimal and short-lived, which ING analysts attribute to market expectations for a 20 basis point cut before the announcement. The BoC emphasized its data-driven approach and acknowledged that inflation risks persisted, which may have contributed to the circumscribed impact on the currency.
ING predicts an additional 75 basis point interest rate cut by the BoC in the second half of 2024, a more dovish stance compared to market expectations for a 50 basis point cut. The potential for a more dovish shift in the Canadian dollar curve is circumscribed by expectations that the U.S. Federal Reserve will not make more than two interest rate cuts this year. Market consensus suggests that the BoC is cautious about significantly increasing the interest rate differential with the Fed.
However, analysts believe that the likelihood of further easing of monetary policy by the Fed and the BoC’s willingness to act independently are underestimated by markets. BoC Governor Tiff Macklem did not rule out the possibility of an interest rate cut in July, stating that decisions would be made “one meeting at a time.” A drop in inflation could prompt an earlier cut in interest rates, although the next cut in September is more likely.
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) are benefiting from the central bank’s hawkish stance, are considered more undervalued and are expected to rebound faster if US interest rates fall this summer.
On the exchange rate front, the company’s Federal Reserve projection suggests the U.S. dollar may underperform relative to other currencies over the summer, supporting the hypothesis that USD/CAD could fall below 1.35 in the second half of 2024.
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