Raevon Bourque

When it rains, it pours, and that is certainly the case for the Canadian economy and the Canadian dollar this week. Bad news is piling on, pushing the USD/CAD above 1.38 for the first time in 14 weeks.

On Wednesday, for the second time in a row, the Bank of Canada cut interest rates. In a clear shift to a more dovish (less aggressive) stance, the bank stated that it is now equally concerned about the negative impact of higher interest rates on the Canadian economy as it is about fighting inflation. This is a clear signal from the bank that more cuts are coming. In fact, the bank all but said so with Governor Macklem stating, “The expected direction of our policy rate is lower, but we’re not on a predetermined path.”

The USD/CAD pair jumped to the 1.3750 range on Friday after the release of weaker-than-expected Canadian Retail Sales numbers, a barometer of the state of the Canadian consumer. This contrasts with the better-than-expected retail sales report from the US Commerce Department on Tuesday, once again stoking fears about the potential of widening interest rate differentials between Canada and the US.

The Canadian dollar slipped to a two-week low against the US dollar on Tuesday as investors reacted to diverging economic data from Canada and the US. On the Canadian side, Statistics Canada released the latest annual inflation rate, which came in at 2.7 percent compared to the expected 2.8 percent. South of the border, US data showed stronger-than-expected retail sales numbers, suggesting that the US consumer is adjusting well to the high-interest-rate environment.

The Canadian dollar touched a three-month high (USD/CAD low) on Thursday after lower-than-expected CPI inflation numbers were reported in the US on Wednesday. However, the Canadian dollar’s momentum quickly dissipated. This appears to be more a case of broad US Dollar weakness rather than Canadian dollar strength, as the broader USD index has lost 1.6% to date in June. The weakening US dollar is a result of increased expectations that the FED will begin its rate-cutting cycle in September, with the market pricing in approximately a 90 percent chance that the FED will cut rates in September (up from about 70% on Wednesday). This view was further reinforced by Chicago FED President Austan Goolsbee, whose dovish comments on Thursday indicated that, in his opinion, the US economy is on track to reach 2% inflation. These are some of the first signals from policymakers that a rate cut is coming.

As the expression goes, “when the US sneezes, Canada catches a cold.” Well, when US inflation cools substantially, the Canadian dollar gains. This morning’s US consumer price index (CPI), a measure of goods and services costs across the economy, fell year-over-year to 3%. This is a more rapid cooling than the 3.1% economists had expected.

Another quiet day in a generally quiet week for the Canadian dollar. The overall market direction has been incremental gains for the Canadian dollar versus the US dollar, mostly based on the perception that the Federal Reserve is inching ever closer to a rate cut in September, with markets currently betting that there is a 70% chance of this happening by then. This has helped alleviate some market concerns about the BoC getting too far ahead of the FED with respect to interest rate differentials.

With a light week in terms of economic data, the Canadian dollar has been treading water for the first few days of this week, trading between 1.3690 and 1.3790 versus the US dollar. However, the latter half of the week includes the Bank of Canada’s (BoC) latest Summary of Deliberations, slated to be released on Wednesday, as well as Canadian Retail Sales coming out on Friday.

Wednesday morning’s US inflation report, the consumer price index (CPI), indicated that inflation rose by 3.3% annually last month, while core prices climbed by 3.4%. This marks the smallest year-over-year increase since 2021. The cooling inflation could boost the likelihood of the Federal Reserve cutting interest rates later this year, especially as the Fed concludes its policy meeting today.