BoC to cut rates before Fed. Forecast as of 22.04.2024

While Jerome Powell says that the Fed needs more time to beat inflation, his counterpart Tiff Macklem from BoC is satisfied with the progress. He does not rule out a cut in the overnight rate as early as June. Let’s discuss this topic and make up a trading plan for USDCAD.

Weekly Canadian dollar fundamental forecast

The financial markets can be full of surprises. In 2024, we observed a unique inverse correlation between the Canadian dollar and oil prices, a departure from the usual trend. Typically, the Canadian dollar strengthens during Brent’s rally and weakens when oil prices fall. However, this year, we saw a shift. The signs of de-escalation in the Middle East conflict pushed Brent down to $86 per barrel, sparking an unexpected upward correction in USDCAD.

Such an outcome was because the US became a net exporter of energy commodities, and the US dollar benefited from Brent’s rally more than its Canadian counterpart did. Rising geopolitical risks are boosting demand for safe-haven assets while increasing the likelihood of accelerating inflation and the Fed keeping the federal funds rate unchanged at 5.5%. The diverging consumer price dynamics underpin the bullish trend in USDCAD.

Canada’s CPI, GDP, and overnight rate

Source: Reuters.

While US inflation accelerated for the third month in a row, Canada’s CPI has been below the upper bound of the BoC’s 1-3% target range since the beginning of the year. The core indicator has been slowing steadily, prompting dovish rhetoric from the Bank of Canada. BoC head Tiff Macklem did not rule out a monetary policy easing in June. Later, he said that he was satisfied with the progress and that the central bank would have plenty of time and new data before June to see if the overnight rate should be cut.

Meanwhile, the rate was raised by 475 bps over 17 months and held at 5% from July 2023. Given the greater sensitivity of mortgage borrowers in Canada to rate hikes compared to the US, we should not be surprised to see a cooling of the economy and inflation.

The futures market expects the BoC to cut borrowing costs by 60 bps in 2024, more than the Fed’s 44 basis points rate cut. This is a tailwind for USDCAD bulls as the US-Canadian bond yield differential has widened to 75 bps from 45 bps in early April. Unsurprisingly, the risk of a reversal in this pair has reached its highest level in over a year.

USDCAD’s risk reversals

Source: Bloomberg.

Although the IMF ranks Canada’s economy as the second fastest-growing G7 economy after the United States, higher taxes on the rich could reduce investment and hurt performance. American exceptionalism and the strength of the US dollar are the result of superior productivity, including AI. As the gap widens, the risks of a continued rally against its Canadian counterpart are increasing.

Weekly USDCAD trading plan

The current USDCAD pullback creates a great opportunity to enter into long trades on the rebound from support at 1.3715 and 1.367. The pair reached its previous targets at 1.372 and 1.382. It may return to these levels and even exceed them.

Price chart of USDCAD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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