Canadian Dollar: Bearish Into Bank of Canada

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The Bank of Canada is likely to verify expectations for a June rate cut at its midweek meeting, which can weigh on the Canadian Dollar say analysts.

The Bank will leave interest rates unchanged on this occasion, but the guidance should offer up some volatility for financial markets as we are reaching a turning point for Canadian interest rates.

"We're expecting the BoC to leave the door open for a June rate cut as underlying core inflation is now beginning to settle below 3%," says Noah Buffam, an analyst at CIBC.

Market bets for a June cut rose following last Friday's release of Canadian job numbers for March, which revealed an unexpected decline in jobs, pointing to a rapidly cooling economy.

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The Bank of Canada won't want to risk maintaining interest rates at current restrictive for too long, for fear of exacerbating any economic slowdown.

The Canadian Dollar fell in the wake of the jobs report, but analysts at Bank of America say the midweek Bank of Canada update could prompt further weakness.

"Should the BoC start the cutting cycle in June as we current expect, it is possible that they may want to provide incrementally more dovish guidance at the next April meeting than past meetings of this year," says Howard Du, an analyst at Bank of America.

Ahead of the Bank of Canada decision, Du and his colleagues are "bearish CAD crosses on potentially dovish guidance".

"A dovish turn at the upcoming April BoC meeting could lead to a more sustained short-term USDCAD breakout above the 1.36 resistance level, before USDCAD eventually reverses lower later this year as bullish momentum fades for the USD," he says

However, the CAD is tipped by Bank of America to weaken further against non-USD currencies as the Bank of Canada could cut interest rates more aggressively than peer central banks.