CAD: 25bp cut by the BoC today

We expect the Bank of Canada to cut the policy rate by 25bp today. This is almost entirely priced in by markets (21bp), which currently expect a total 65bp of easing by year-end. Consensus is not unanimous, but the majority of economists call for a cut as opposed to a hold, ING’s FX strategist Francesco Pesole notes.

USD/CAD may find its way into the 1.38-1.39 range

“There is a strong case from a macro perspective to continue easing after the June cut. All main measures of inflation are now within the 1-3% BoC tolerance band, with the headline and median core rates coming in lower than expected in June at 2.7% and 2.6% respectively. The only argument for keeping rates on hold at this meeting is probably the divergence with the Fed.”

“The widening BoC-Fed gap has obvious repercussions on the Canadian Dollar (CAD), and there could be some concerns down the road that an excessive depreciation of the loonie raises inflationary risks. In our view, as long as USD/CAD stays under 1.40, the currency situation should remain very much secondary in the BoC’s decision-making.”

“There is a possibility that Governor Tiff Macklem will strike a caution tone on further easing and take shelter behind a data-dependent, meeting-by-meeting approach. Still, the risks are skewed towards the downside for CAD as markets will be tempted to fully price in another two cuts by year-end. USD/CAD may find its way well into the 1.38-1.39 range in the near term, and CAD could start losing some ground against other high-beta G10 currencies.”

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