Canadian Dollar "Looks Like the Least Attractive"

Above: File image of BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing.

The Bank of Canada will deliver a succession of rate cuts in the coming months, weighing on the Canadian Dollar, say analysts.

Francesco Pesole, FX Strategist at ING Bank, says investors are underestimating the number of cuts to come from the Bank of Canada, and this makes CAD "the least attractive commodity currency in G10."

The Bank of Canada cut interest rates by 25 basis points on Wednesday, and Governor Tiff Macklem said further cuts were possible.

The Canadian Dollar fell in response but pared most of its losses against its G10 peers by the time the day ended.

"Weakness in the Canadian dollar was rather limited and short-lived," says Pesole. He says the Bank of Canada's messaging was relatively guarded and the Canadian Dollar had already been weak heading into the event, which explains the relatively soft FX impact.

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But ING economists see 75 basis points of further cuts from the Bank of Canada this year, which is more dovish than the market's anticipation for 50bp.

"Markets are also seemingly turning a blind eye to Governor Tiff Macklem’s reluctance to rule out a July cuts," says Pesole. Macklem said the Bank will take decisions "one meeting at a time". ING thinks another fall in inflation may put them on the spot already in July,

Economists at Commerzbank say they can imagine a kind of "frontloading", i.e. two rate cuts in quick succession so that the Bank does not have to cut rates more sharply later if the real economy weakens more significantly without stronger support.

"For this to happen, however, inflation will have to play along and the risks cited by the BoC, such as wage pressures, inflation expectations or the still high price pressure on housing, will have to abate. If these factors develop favorably, the next meeting at the end of July promises to be just as exciting as yesterday's," says Michael Pfister, FX Analyst at Commerzbank.

"We think CAD continues to look like the least attractive commodity currency in G10. NOK, AUD and NZD can all count on hawkish domestic central banks, are more undervalued, and should rally faster in a scenario where USD rates decline this summer," says Pesole.

"Overall, monetary policy divergence supports the downtrend in CAD versus AUD, NZD, and NOK. Unlike the BOC, the RBA, RBNZ and Norges Bank are in no rush to loosen policy," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman.

Stephen Brown, Deputy Chief North America Economist at Capital Economics, says the June interest rate cut from the Bank of Canada will be the first of many, and the dovish tone of the accompanying communications suggests that another rate cut in July is already nailed on.