BoC rate cut likely to be followed by more in 2H24 By Investing.com

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 brief, which ING analysts attribute to market anticipation 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 effect on foreign exchange.

ING anticipates an additional 75 basis point reduction by the BoC in the second half of 2024, a stance that is more dovish compared to the market’s expectation of a 50 basis point cut. The potential for a more dovish shift in the Canadian dollar curve is tempered by predictions that the U.S. Federal Reserve will not implement more than two rate cuts this year. The market consensus suggests the BoC is cautious about significantly increasing the interest rate differential with the Fed.

However, analysts believe the likelihood of further easing by the Fed and the BoC’s willingness to act independently are both being underestimated by the markets. The BoC’s Governor, Tiff Macklem, has not dismissed the possibility of a rate cut in July, stating that decisions will be made “one meeting at a time.” A decline in inflation could prompt an earlier rate cut, though September is viewed as more probable for the next reduction.

In the context of commodity currencies within the G10, the Canadian dollar is perceived as the least appealing option. Currencies like the Norwegian krone (NOK), Australian dollar (AUD), and New Zealand dollar (NZD) benefit from hawkish central bank stances, are considered more undervalued, and are expected to recover more quickly if U.S. interest rates fall this summer.

Regarding the exchange rate, the firm’s projection for the Federal Reserve suggests the potential for the U.S. dollar to underperform against other currencies during the summer, which supports the hypothesis that USD/CAD could drop below 1.35 in the second half of 2024.

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