There is widespread anticipation that the Bank of Canada (BoC) will enact a 25 basis points reduction in its policy rate during its forthcoming meeting scheduled for Wednesday, June 5. If realized, this would mark the first rate cut following six consecutive meetings where rates remained unchanged at 5.00%.
Throughout the year, the Canadian Dollar (CAD) has exhibited a gradual depreciation against its US counterpart (USD), although it has predominantly maintained a consolidation phase over the past few months.
April saw another decline in the annual domestic inflation as measured by the headline Consumer Price Index (CPI), with the BoC’s Core CPI dipping below the critical threshold of 2.0% to 1.6% year-on-year (YoY).
The potential rationale behind the central bank‘s contemplation of a rate cut could be attributed to the persistent downward trajectory of consumer prices, alongside the anticipated further cooling of the Canadian labor market.
Inflation has consistently remained below 3% since January, aligning with the central bank’s projections for the first half of 2024, with core consumer price indicators showing a steady decline.
The BoC is expected to maintain its data-dependent approach concerning future rate adjustments. Currently, money markets are indicating an anticipated easing of around 30 basis points in July and nearly 42 basis points in September. The central bank may exhibit cautiousness while also potentially demonstrating flexibility due to the ongoing decline in domestic inflation.
Despite the projected rate cut, the overall tone from the central bank may lean towards caution, emphasizing the data-dependent stance while closely monitoring inflation developments.
Bank of Canada Governor Tiff Macklem had stated during testimony to the House of Commons finance committee in early May that there exists a limit to the divergence between US and Canadian interest rates, although emphasizing that they have not reached that limit. Additionally, during testimony to the Senate banking committee on May 1, Macklem acknowledged the decreasing inflation and the public’s anticipation regarding interest rate cuts, stating that “we are getting closer” to such actions.
The Bank of Canada is scheduled to release its monetary policy decision at 13:45 GMT on Wednesday, June 5, followed by Governor Macklem’s press conference at 14:30 GMT.
The impact on the Canadian currency is expected to stem primarily from the central bank’s messaging rather than the interest rate adjustment itself. A conservative approach may provide support for CAD, potentially leading to a decline in USD/CAD. Conversely, indications of further rate reductions could result in a significant drop in the Canadian Dollar’s value.
According to Pablo Piovano, Senior Analyst at FXStreet.com, the gradual uptrend in USD/CAD since the beginning of the year seems to be reinforced by surpassing the key 200-day SMA (1.3506). However, resistance has been encountered around the year-to-date highs at 1.3650. A sustained breach above this level could propel the pair towards the November 2023 high of 1.3898 (November 1).
Pablo adds that if sellers gain momentum, the 200-day SMA should provide solid support until the March low of 1.3419 (March 8). Further weakness may lead to a move below the weekly low of 1.3358 (January 31).
Related Topics:
