USDCAD Pierces 1.38 After Dovish BOC Rate Cut

The Bank of Canada (BoC) lowered the policy interest rate by 25 basis points to 4.5% from 4.75% previously. The Bank is continuing its policy of balance sheet normalization. That lead to a significant drop in the Canadian dollar, with USDCAD, pushing above 1.38. Looking ahead, the Bank of Canada expects inflation to continue its downward trend.

The Bank of Canada announced a reduction in the policy interest rate to 4.5%, emphasizing three main considerations. Firstly, the Bank’s monetary policy aims to reduce overall price pressures in the economy. Secondly, there is ample economic capacity, with sufficient resources and slack in the labor market, allowing for significant economic growth without triggering inflation. Lastly, the decision balances the risk of inflation exceeding expectations with the potential for economic activity to slow more quickly than anticipated as inflation approaches the 2% target. So this is bearish for the CAD, so this was a dovish rate cut from them and will keep the CAD on the back foot in the weeks to come, so we’re keeping a bullish bias for USD/CAD .

USD/CAD Chart H1 – Upside Momentum Picking Up Pace

In its statement, the Bank of Canada (BOC) highlighted that the Consumer Price Index (CPI) inflation rate declined to 2.7% in June, following an increase in May. The overall inflationary pressures are diminishing. The BOC’s preferred metrics for core inflation have stayed below 3% for several months, reflecting a reduced range of price increases across various CPI components. The Bank anticipates that CPI inflation will dip below the core inflation rate in the latter half of the year, largely due to the base year effects on gasoline prices.

Bank of Canada Interest Rate Decision and Policy for July 2024

• BoC lowered the policy interest rate by 25 basis points to 4.5% from 4.75% previously.
• Bank Rate at 4.75% from 5.00% previously
• deposit rate at 4.50% from 4.75% previously
• Key considerations for the decision:
  • Monetary policy is easing broad price pressures.
  • Economy has excess supply and slack in the labor market, allowing for growth without inflation.
  • Balancing risk of higher-than-expected inflation with risk of weaker-than-expected economy and inflation.
• Inflation is expected to moderate, with progress being uneven due to opposing forces.
• Further interest rate cuts are possible if inflation eases as forecasted; decisions will be made based on evolving economic conditions.
• Economic growth in Canada remains weak relative to population growth; household spending is soft and debt payments are high.
• The labor market shows some slack, with a rising unemployment rate and moderating wage growth.
• Economic growth is expected to increase in the latter half of 2024 and through 2025 due to stronger exports, recovery in household spending, and robust residential investment.
• CPI inflation moderated to 2.7% in June; core inflation measures have been below 3% for several months.
• Inflation in shelter and wage-affected services remains high.
• Core inflation is expected to slow to about 2.5% in the second half of 2024 and ease further in 2025.
• CPI inflation is forecast to settle around the 2% target next year, though not in a straight line.
• Risks to the inflation outlook include geopolitical uncertainty and potential weaker household spending in Canada.
• BoC is committed to restoring price stability for Canadians.

USD/CAD Live Chart