Canadian Interest Rate Decision: Rate Cut Expected, Focus on Future Policy
Market Expectations:
- Rate Cut Anticipation: The Bank of Canada (BoC) is widely expected to cut its key interest rate by 25 basis points (bps) on Wednesday, June 5th. This would be the first rate cut in over six months.
- Canadian Dollar (CAD): The CAD has been depreciating against the US Dollar (USD) this year, but has mostly consolidated in recent months.
Reasons for Potential Rate Cut:
- Falling Inflation: Canadian inflation has been below 3% since January, and core inflation indicators are also dropping steadily.
- Cooling Labor Market: The BoC might consider a rate cut due to the anticipated slowdown in the Canadian labor market.
BoC's Future Policy Stance:
- Data-Dependent Approach: The BoC is expected to maintain its data-dependent approach regarding future rate adjustments.
- Potential for Further Cuts: Money markets predict an additional 30 bps cut in July and nearly 42 bps in September.
- Cautious Optimism: The BoC might adopt a cautious tone, emphasizing its data dependency while monitoring inflation developments.
Governor Macklem's Previous Statements:
- Interest Rate Divergence with US: Governor Macklem acknowledged the limitations of divergence between US and Canadian interest rates, but suggested they are not near that limit yet.
- Acknowledging Public Interest: He recognized Canadians' desire for rate cuts and indicated that the BoC is "getting closer."
Impact on USD/CAD:
- Policy Statement More Important: The message from the BoC, rather than the rate cut itself, is likely to have a greater impact on the CAD.
- Conservative Approach Could Support CAD: A cautious stance by the BoC might strengthen the CAD and weaken USD/CAD.
- Further Rate Cuts Could Weaken CAD: If the BoC signals additional rate cuts, the CAD could depreciate significantly.
Technical Analysis (USD/CAD):
- Gradual Uptrend: USD/CAD has been on a gradual uptrend since the beginning of 2024.
- Key Resistance Level: The pair recently surpassed the 200-day SMA (1.3506) but faces resistance near the year-to-date highs (1.3650).
- Support and Potential Downside: The 200-day SMA could provide support, with potential downside targets at the March low (1.3419) and the weekly low (1.3358).
Overall:
The BoC's rate cut is almost certain, but the future policy outlook and the accompanying statement will be crucial for the CAD's direction. A cautious approach by the BoC could strengthen the CAD, while signals of further rate cuts might lead to a depreciation. USD/CAD is currently facing resistance at key levels, and its future movement will depend on the BoC's policy stance and broader market sentiment.