Investing.com — On Wednesday, the Bank of Canada (BoC) cut interest rates by 25 basis points. The impact on the Canadian dollar was minimal and short-lived, which ING analysts attributed to market expectations of a 20 basis point cut prior to the announcement. The BoC emphasized its data-dependent approach and acknowledged persistent inflation risks, which may have contributed to the limited foreign exchange impact.
ING expects an additional 75 basis points cut by the BoC in the second half of 2024, a stance that is milder than the market expectation of a 50 basis points cut. The potential for a milder shift in the Canadian dollar curve is tempered by forecasts that the US Federal Reserve will make no more than two interest rate cuts this year. Market consensus suggests that the BoC is cautious about significantly widening the interest rate differential with the Fed.
However, analysts believe that the likelihood of further Fed easing and the BoC’s willingness to act independently are both being underestimated by markets. BoC Governor Tiff Macklem has not dismissed the possibility of a rate cut in July, saying decisions will be taken ‘meeting by meeting’. A fall in inflation could prompt an earlier rate cut, although September is seen as more likely for the next cut.
In the context of commodity currencies within the G10, the Canadian dollar is seen as the least attractive option. Currencies such as the Norwegian Krone (NOK), the Australian Dollar (AUD) and the New Zealand Dollar (NZD) are benefiting from the central bank’s hawkish stance, are considered more undervalued and are expected to recover faster as US yields drops this summer.
On the exchange rate front, the firm’s projection for the Federal Reserve suggests that the US dollar may underperform against other currencies over the summer, supporting the hypothesis that the USD/CAD will fall below 1 in the second half of 2024 .35 could drop.
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