While Wednesday ‘s decision to hold the Bank of Canada’s key overnight rate at 5% was widely expected, you could argue that the BoC’s shift in tone and messaging was somewhat of a surprise. The BoC acknowledges that the discussion has now ‘shifted’ from whether more hikes are needed to how long to keep rates elevated. However, this still disappointed markets, and the Canadian dollar weakened on the news, falling to a six-week low against the US dollar. In essence, the markets were of the opinion that the BoC will cause unnecessary damage to the Canadian economy by waiting too long to cut rates. The range of predictions for the first rate cut ranges between April and June of 2024. The BoC’s new inflation forecast sees inflation at 3% for the first half of 2024, before falling to 2.5% by the end of the year and returning to the 2% target in 2025.
The Canadian dollar’s weakness was short-lived, however, as a number of economic reports on Thursday morning helped to reassure investors that a soft landing in the US is possible. This strengthened the US dollar against the Canadian dollar. The logic goes something like this (follow us if you can): if the US economy continues to stay relatively resilient while inflation comes down (the coveted soft landing), then the Canadian dollar, in the long run, would benefit more from both a lower interest rate environment and a more risk-on environment.