The Canadian dollar is drifting within a narrow range against the USD during Monday’s trading session. Markets are looking past weaker-than-expected manufacturing numbers published on Monday from both north and south of the border as they focus on the Bank of Canada’s interest rate announcement on Wednesday, June 5th.
After last Friday’s disappointing Canadian GDP numbers, markets are speculating that there is an 80 percent chance that the bank will cut rates by a quarter point. Some economists predict a total cut of 75 to 125 basis points, paced out over the rest of the year by the BoC. Other developed economies are in a similar position, with the Swiss and Swedish central banks already beginning to cut rates, and the European Central Bank expected to announce its first interest rate cut on Thursday.
Of course, the only central bank, other than the BoC, that can directly impact the direction of the USD/CAD would be the US Federal Reserve, which is not expected to cut rates until the 4th quarter of 2024. The BoC has indicated that it is not eager to have a substantial interest rate difference between itself and the Fed. In a very fascinating analysis, TD economists have examined how the Canadian dollar has reacted to previous instances of interest rate divergence between the BoC and the Fed. According to the research, if you assume a 125 basis point difference combined with a worsening geopolitical environment, the Canadian dollar may weaken significantly, perhaps dropping below the psychological 1.43 (USD/CAD).
The Canadian dollar is currently trading at1.3636 CAD against the US Dollar.