Heading into the Victoria Day long weekend, the Canadian dollar is sitting pretty. It has gained 1.5 cents this month against the US dollar, following an explosive jobs report last Friday and weaker-than-expected economic data from the US. Just as recently as two weeks ago, economists were floating the idea that the BoC could be cutting rates at the same time as the Fed was increasing interest rates. This would have been the definition of a disastrous situation for the Canadian dollar.
Having said all that, not much has really changed in the expected direction of interest rate cuts for both the BoC and the Fed. Despite the spectacular Canadian jobs numbers, investors still see the BoC cutting rates either in June or July, albeit the markets have lowered their expectation of a cut in June from 66% to 45%. Similarly, despite the weaker-than-expected US economic jobs data in recent weeks, the Fed is still not expected to cut rates until September.
What has really happened with the apparent slowing of the US economy and the stabilizing of the Canadian economy is that market watchers have ruled out the case of extreme divergence between the Fed and the BoC. This has helped bring the Loonie out of its tailspin against the USD.
Markets will be watching next week’s Canadian inflation numbers closely for more clarity on the BoC’s next move. A recent poll of experts anticipated year-on-year consumer price inflation to be at 2.8% for April, down from 2.9% in March. Statistics Canada is expected to release the official April data on May 21. From our perspective, unless there is a significant uptick in Canadian inflation, we expect the BoC to make its first interest rate cut at its June 5th meeting.
The Canadian dollar is currently trading at 1.3609 CAD against the US Dollar.
