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US Canadian Dollar Rate Outlook: "USD/CAD to find good demand below 1.34 mark" say ING

January 25, 2024 - Written by John Cameron


Bank of Canada Drops Talk of Higher Interest Rates, GBP/CAD Exchange Rate Hits 7-Week Highs

The Bank of Canada held interest rates at 5.00% following the latest council meeting, in line with consensus forecasts.

The bank provided no clear guidance on rates, but the Canadian dollar lost ground as the bank statement dropped references to the risk of further interest rate hikes.

Markets were, therefore, comfortable with speculating over the timing of rate cuts which eroded Canadian dollar support.

The Dollar to Canadian dollar (USD/CAD) exchange rate strengthened to 1.3490 from 1.3430 lows while the Pound to Canadian dollar (GBP/CAD) exchange rate hit 7-week highs at 1.7200.

According to the bank; “With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply.”

It does, however, expect that the economy will strengthen over the second half of 2024.

GDP growth is now forecast at 0.8% for 2024 with 2.4% growth in 2025.

The bank pointed to mixed inflation evidence; “While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.”

In this context it added; “The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”

According to CIBC chief economist Avery Shenfeld; “the Bank of Canada has "dangled some hints that lower rates are on the way later this year."

With rate hikes seen as off the table, markets speculation over rate cuts continued.

CIBC’s Shenfield added; "The statement dropped the earlier reference to a potential need to hike if inflation failed to cool, changing it into a less hawkish comment that they remain 'concerned' about persistent core inflation. That’s a dovish tilt, but is still consistent with our call for a first rate cut in June, with as much at 150 bps of cuts on tap this year."

Stephen Brown, deputy chief North America economist for Capital Economics expects an earlier cut; "We continue to think that the Bank’s forecasts for the economy are too optimistic, and that inflation will slow faster than the Bank expects, leading us to forecast the first rate cut in April."

Bank Governor Macklem stated that it was premature to discuss a rate cut.

According to Scotiabank Vice President of Capital Markets Derek Holt; "Generally speaking, he (BoC Governor) is pushing against the market pricing for nearer-term rate cuts when he says that the debate now is how long do they have to remain at the current 5% policy rate and that they are as concerned as they were previously even maybe a bit more so about inflation risk.”

He added; “So, no hints that rate cuts anytime soon in this set of communications."

TD Securities commented; "They remain concerned about the persistence of underlying inflation. Therefore, while they are almost certainly done with rate hikes, they are not looking for near term rate cuts until we see further progress on the inflation front."

MUFG noted dovish expectations; “The reports revealed that core inflation picked up at the end of last year which should make the BoC reluctant to discuss rate cuts as at today’s policy meeting.”

It added; “If that proves to be the case it could disappoint market expectations for earlier BoC cuts and encourage a stronger Canadian dollar. However, we expect any upside for the Canadian dollar to be only modest.”

According to ING; “we expect USD/CAD to find good demand below the 1.34 mark.”

Scotiabank looked at technical levels; “On the daily chart, the USD’s failure to hold gains through the upper 1.34s is starting to look a little more significant, with spot losses compromising trend support of the late December low. Resistance at 1.3480/00 is firming up.”
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