BoC May Cut Rates Before Fed Amid Weaker Loonie, Inflation Concerns

The Bank of Canada (BoC) might reduce interest rates three times before the Federal Reserve (Fed) makes its first cut, according to a survey of analysts. This comes amid concerns that a weakening Canadian dollar could threaten inflation targets. The Canadian dollar has depreciated nearly 3% against the U.S. dollar this year, sparking discussions on the extent to which the BoC will diverge from U.S. monetary policy.

Investors anticipate the BoC to begin cutting rates by June or July, with upcoming inflation data being crucial. Conversely, the Fed is expected to maintain its rates until September, even after lower-than-expected U.S. inflation figures were released. A greater disparity could further pressure the Canadian dollar.

However, Bank of Canada Governor Tiff Macklem recently noted that while there's a limit to how much U.S. and Canadian interest rates can diverge, that limit has not yet been reached. The Canadian economy has been trailing behind the U.S., hindered by weaker productivity, higher household debt, and shorter mortgage cycles. These factors might prompt the BoC to act before the Fed.

Imported goods become pricier with a weaker currency, which can drive up consumer prices. Inflation in Canada was recorded at 2.9% annually in March, a decrease from 8.1% in June 2022. The OECD forecasts Canada’s economy to grow by 1% this year, compared to 2.6% for the U.S.

In April, Canada's job market outperformed expectations by adding 90,400 jobs, far exceeding the forecasted 18,000, and keeping the unemployment rate steady at 6.1%. Following the jobs report, the likelihood of a June rate cut dropped to 48% from 54%, with a September cut fully anticipated.

On the global front, the U.S. dollar faced a significant weekly decline after weaker U.S. retail sales and lower-than-expected inflation heightened expectations for Fed rate cuts starting in September. Several Fed officials expressed the need for more confidence in inflation’s downward trajectory before changing monetary policy. Despite mixed economic signals, such as flat retail sales and falling manufacturing output, the Fed is expected to maintain higher rates longer due to persistent inflation pressures.

Global economic data, including PMI releases from the U.S., China, the euro zone, and the U.K., suggest a cautiously optimistic outlook. Various Fed officials, including those from Atlanta, Cleveland, New York, and Richmond, are scheduled to speak throughout the week. Additionally, economic reports on home sales, durable goods orders, and consumer sentiment are expected.

However, ongoing trade tensions, particularly between the U.S. and China, pose risks to global growth and inflation. The looming U.S. election could disrupt China's recovery and potentially reignite U.S. inflation. This might result in the USD/CAD currency pair continuing to trade within its current range due to the similar returns between the two countries. There could also be a slight reversal and a modest strengthening of the U.S. dollar.

Data for Technical Analysis (1H) CFD USD/CAD

Resistance : 1.3609, 1.3611, 1.3614

Support : 1.3603, 1.3601, 1.3598

1H Outlook

Source: TradingView

Buy/Long 1 If the support at the price range 1.3598 - 1.3603 is touched, but the support at 1.3603 cannot be broken, the TP may be set around 1.3609 and the SL around 1.3596, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3609 - 1.3614, TP may be set around 1.3621 and SL around 1.3601, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3609 - 1.3614 is touched, but the resistance 1.3609 cannot be broken, the TP may be set around 1.3601 and the SL around 1.3616, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3598 - 1.3603, TP may be set around 1.3590 and SL around 1.3611, or up to the risk appetite.       

Pivot Points May 20, 2024 02:05AM GMT