BoC's Governor Macklem: Monetary policy is still restrictive
|Governor Tiff Maclem will hold his press conference amidst the release of the BoC's Monetary Policy Report (MPR).
Key Takeaways
We don't need more excess supply.
We need growth and job creation to start picking up.
We're not on a predetermined rate path.
We will make decisions on a meeting-by-meeting basis.
Decisions on interest rates will be based on incoming data.
There was a clear consensus to cut by 25 bps.
We don't think we're at a normalized state on our balance sheet yet.
Monetary policy is still restrictive.
We don't want to weaken the economy too much and have inflation go below our 2% target.
This section below was published after the Bank of Canada (BoC) interest rate decision at 13:45 GMT
In line with market consensus, the Bank of Canada (BoC) delivered a back-to-back 25 bps interest rate cut, taking its policy rate to 4.50% (from 4.75%) at its monetary policy meeting on Wednesday.
The BoC revised its growth forecast for 2024 downwards, attributing the adjustment to decreased consumption. In addition, the bank reaffirmed its expectation that inflation will sustainably return to its 2% goal in the H2 2025.
In its quarterly monetary policy report, the central bank projected 2024 growth at 1.2% (vs. 1.5% forecasted in April).
Additionally, the BoC noted a decline in consumption, driven by reduced demand for motor vehicles and foreign travel, as well as households dedicating a larger portion of their income to debt payments.
It estimated that the economy expanded by an annualized 1.7% in the first quarter, significantly lower than the 2.8% predicted in April.
The bank also stated that overall inflation is expected to fall below core inflation in the second half of 2024, partly due to base-year effects on gasoline prices. This effect will diminish by the first half of next year, and inflation is anticipated to stabilize at 2% in the second half of 2025.
Market reaction
The Canadian Dollar depreciates further and drops to three-month lows vs. the US Dollar, taking USD/CAD beyond the 1.3800 barrier on Wednesday.
Canadian Dollar PRICE Today
The table below shows the percentage change of Canadian Dollar (CAD) against listed major currencies today. Canadian Dollar was the strongest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.03% | -0.17% | -1.38% | 0.07% | 0.19% | 0.22% | -0.86% | |
| EUR | 0.03% | -0.14% | -1.38% | 0.08% | 0.22% | 0.25% | -0.83% | |
| GBP | 0.17% | 0.14% | -1.21% | 0.23% | 0.36% | 0.39% | -0.71% | |
| JPY | 1.38% | 1.38% | 1.21% | 1.49% | 1.61% | 1.62% | 0.53% | |
| CAD | -0.07% | -0.08% | -0.23% | -1.49% | 0.13% | 0.17% | -0.94% | |
| AUD | -0.19% | -0.22% | -0.36% | -1.61% | -0.13% | 0.03% | -1.06% | |
| NZD | -0.22% | -0.25% | -0.39% | -1.62% | -0.17% | -0.03% | -1.09% | |
| CHF | 0.86% | 0.83% | 0.71% | -0.53% | 0.94% | 1.06% | 1.09% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Canadian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent CAD (base)/USD (quote).
This section below was published as a preview of the Bank of Canada interest rate decision at 08:00 GMT.
- The interest rate in Canada is set to be lowered by 25 bps to 4.50% on Wednesday.
- The Bank of Canada Governor Macklem’s words will be closely scrutinized for further policy cues.
- The Canadian Dollar is primed for a big reaction to the BoC policy announcements.
The Bank of Canada (BoC) is widely anticipated to lower its key interest rate by 25 basis points (bps) from 4.75% to 4.50% at its monetary policy meeting on Wednesday, July 24. The Canadian Dollar (CAD) is primed for a big volatility spike in reaction to the BoC policy announcements.
Bank of Canada set for another interest rate cut
The Canadian central bank is seen cutting rates for the second consecutive meeting and the decision will be announced at 13:45 GMT. Governor Tiff Macklem’s press conference will follow at 14:30 GMT.
In June, the BoC delivered its first interest-rate cut since a series of hikes that began in March 2022, slashing rates by 25 bps from 5.0% to 4.75%, as the central bank felt confident that inflation will continue to move towards the 2% target.
Governor Tiff Macklem mentioned that it is reasonable to expect more rate cuts if inflation continues to ease.
Since then, inflation in Canada slowed down further, with the headline annual Consumer Price Index (CPI) rising 2.7% in June, cooler than the BoC's 2.9% inflation forecast for the end of the first half of 2024.
“Month-over-month, the consumer price index was down 0.1%, compared with a forecast for no change. Statistics Canada data showed this was the first deceleration in the monthly inflation rate since December,” according to Reuters.
Loosening Canadian labor market conditions also cemented the case for another rate cut in July. The country lost 1,400 jobs in June while the Unemployment Rate rose to 6.4%, Statistics Canada reported earlier this month.
Markets are currently pricing in a 92% probability of a rate cut this week, with another cut also on the table later this year.
How will the BoC monetary policy decision affect USD/CAD?
As the rate cut is fully baked in, markets will closely scrutinize the language in the policy statement and Governor Macklem’s words for the bank’s next interest rate move. At the presser following the June policy meeting, BoC Governor Tiff Macklem said that “the timing of any further cuts will depend on data.”
Amidst sticky core inflation, it remains to be seen if the BoC adopts a prudent approach while hinting at the policy outlook in the coming months. In case the BoC cautions on the inflation outlook, the Canadian Dollar could receive a much-needed respite, as it would imply that the central bank could rein in its easing cycle.
If the bank acknowledges progress in disinflation and intends to lower rates further, the CAD may see an extension of the ongoing downtrend in the near future.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers key technicals for trading USD/CAD on the policy outcome.
"The USD/CAD pair is sitting at the highest level in six weeks at 1.3775 in the lead-up to the BoC showdown. Buyers appear to be biding time before the next leg higher, as the 14-day Relative Strength Index (RSI) stays firm above the 50 level while a Bull Cross remains in the making. The 21-day Simple Moving Average (SMA) is on the verge of crossing the 50-day SMA for the upside, which if realized daily closing basis will validate a bullish crossover.”
"On a renewed upside, USD/CAD could initiate a fresh advance toward the 2024 highs of 1.3846. Ahead of that, the 1.3800 barrier needs to be taken out decisively. The next target for buyers is aligned at the 1.3900 round level. Conversely, strong support is seen at around 1.3680, where the 21-day and 50-day SMA converge. Acceptance below that level will put the 100-day SMA of 1.3630 to the test. The last line of defense for USD/CAD optimists is at the 200-day SMA of 1.3595,” Dhwani adds.
Economic Indicator
BoC Interest Rate Decision
The Bank of Canada (BoC) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoC believes inflation will be above target (hawkish), it will raise interest rates in order to bring it down. This is bullish for the CAD since higher interest rates attract greater inflows of foreign capital. Likewise, if the BoC sees inflation falling below target (dovish) it will lower interest rates in order to give the Canadian economy a boost in the hope inflation will rise back up. This is bearish for CAD since it detracts from foreign capital flowing into the country.
Read more.Last release: Wed Jun 05, 2024 13:45
Frequency: Irregular
Actual: 4.75%
Consensus: 4.75%
Previous: 5%
Source: Bank of Canada
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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