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 attributed to the market’s expectation of a 20 basis point rate cut before the announcement. The Bank of Canada emphasized its data-driven approach and acknowledged persistent inflation risks that may have contributed to the limited impact on the exchange rate.
ING expects an additional 75 basis points of rate cuts from the Bank of Canada in the second half of 2024, a softer stance compared to market expectations of a 50 basis points cut. The potential for a more dovish shift in the Canadian dollar curve is tempered by forecasts that the US Federal Reserve won’t make more than two rate cuts this year. Market consensus suggests the Bank of Canada is cautious about widening its interest rate differential with the Fed significantly.
However, analysts believe that the likelihood of further easing by the Fed and the Bank of Canada’s willingness to act independently are being underestimated by markets. Bank of Canada Governor Tiff Macklem did not rule out the possibility of a rate cut in July, saying decisions would be made “one meeting at a time.” Lower inflation could lead to an earlier rate cut, although September is seen as more likely for the next cut.
In the context of G10 commodity currencies, the Canadian dollar is perceived as the least attractive option. Currencies such as the Norwegian krone (NOK), Australian dollar (AUD) and New Zealand dollar (NZD) benefit from the central bank’s aggressive stance, are seen as more undervalued and are expected to recover faster if US interest rates fall this summer.
On the exchange rate front, the firm’s forecast for the Federal Reserve suggests the possibility that the US dollar will weaken against other currencies in the summer, supporting the hypothesis that USD/CAD could fall below 1.35 in the second half of 2024.
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