Canadian Dollar Exchange Rates Slide As Bank Of Canada Cut Rates 25bps

While it was widely expected, the Bank of Canada’s decision to cut interest rates on Wednesday is still an important milestone. The BoC is the first of the major Central Banks to ease following one of the most aggressive hiking cycles in history. How the Canadian stock market, the Canadian Dollar, and indeed, the Canadian economy react to the cut could set a precedent for other countries and markets as other Central Banks are set to cut this year. The ECB is very likely to embark on its easing cycle on Thursday, with the BoE and Fed expected to ease in August and September respectively.

The initial reaction in the Canadian Dollar has been logical. It has dropped –0.3% against the US dollar and is slightly lower against the euro and pound. A cut was around 85% priced in ahead of the meeting so there is scope for some minor downside, but volatility has been relatively low.

In other markets, Wednesday’s session has been largely bullish. The DAX is +0.8%, the S&P500 +0.5% and the FTSE is slightly lagging with a gain of +0.25%. The majority of major currencies are flat, with only the Canadian Dollar and the Australian Dollar making moves of any note. The latter is lower by –0.27% against the US Dollar after Australian GDP missed estimates with a weak reading of just 0.1% q/q. This will give the RBA a headache as it now has to balance sticky inflation with a slowing economy. Unlike the BoC, the ECB. BoE and Fed, the RBA are not expected to cut rates this year. However, that may change if GDP growth remains low and the prospect of an earlier cut will weigh on the “Aussie.”

BoC First to Cut

Central Banks in emerging market countries were the first to cut rates last year. Sweden’s Riksbank and the Swiss National Bank followed more recently, and the BoC is now the first of the G7 Banks to ease. The Bank cut 25bps from 5.0% to 4.75% on Wednesday as it finally seems inflation is under control.

“With further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” Governor Tiff Macklem announced.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”

Markets have reacted and a further cut in July is now 35% priced in.

Inflation currently sits at 2.7%, which is a three-year low and the disinflation trend has been steadier than the likes of the US as inflation has stayed below 3% for four months in a row. That said, it is still higher than the Bank’s 2% target and any uptick could delay the next cut.

The BoC will be watching the economy and related markets particularly closely. While a 25bps cut is not expected to have a significant effect, it may change sentiment in businesses and consumers and their actions could stimulate the economy. The Bank may therefore delay the next move to give enough time to assess the situation. As ING note,

“…we do indeed expect further rate cuts, but we are doubtful on back-to-back moves at the July meeting. Instead we are forecasting 75bp of further cuts this year with the policy rate hitting 3.5% in Q1 2025.”

This is likely to weigh on the Canadian Dollar going forward, and Wednesday’s mild weakness is perhaps just a taste of things to come.