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Canadian Dollar Direction Driven by Interest Rate Expectations

By May 22, 2024No Comments

The USD/CAD currency pair is slightly higher in early afternoon trading on Wednesday as markets nervously await the release of the Federal Open Market Committee (FOMC) minutes later in the day. Markets are looking to the release of the FOMC minutes to possibly shed light on when the Fed will feel confident enough to shift into its rate reduction cycle. Currently, markets are anticipating a rate cut in September or November of this year.

The latest batch of economic data has shown some softening, including April’s US Consumer Price Index (CPI) data and home sales, both of which were down for the second consecutive month. Despite this, the Fed has indicated that while they believe interest rates are restrictive enough at their current levels, they have been adamant that the fight against inflation is not done and that rates need to be held at this level for longer.

Meanwhile, in Canada, the BoC has now seen four consecutive months of lower-than-expected inflation data. The question is whether this will be enough to start cutting interest rates at the BoC’s June meeting. The answer will depend on whether the BoC is more concerned about damaging the Canadian economy and consumers or if it is committed to stamping out inflation. While most economists are calling for a rate cut in June, the Fed’s decision to hold rates higher for longer will provide the BoC with the cover needed to wait until July if it really wants to ensure that inflation will not creep back up.

If the BoC does cut rates in June and today’s release of the Fed minutes is hawkish (suggesting that rates will be held longer than September or November), then you can expect the Canadian dollar to weaken further against the US dollar.

The Canadian dollar is currently trading at 1.3662 CAD against the US Dollar.



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