Where Is the CAD Headed After the Third BOC Rate Cut?

The CAD accelerated the decline yesterday, with USD/CAD surging almost 80 pips, reaching 1.3560s, with the BOC meeting approaching. Markets were anticipating the third consecutive 25 bps rate cut by the Bank of Canada, after two such moves in the last two meetings, however, the possibility of a 50 bps cut was also on the table. the BOC delivered a 25 bps cut, but the forex pair is moving on the softer JOLTS job openings numbers.

USD/CAD fell by 5 cents in August before reversing direction last week as markets prepared for the Bank of Canada’s third rate cut. The gains for USD/CAD were initially modest, but momentum picked up yesterday, pushing the price above the 200 SMA (purple). However, after the BOC the pair reversed lower, as US JOLTS job openings came on the soft side, showing that the labour market is having difficulties. USD/CAD is back down to 1.35.

USD/CAD Chart Daily – The 50 SMA Has Been Broken

Although the Manufacturing PMI survey released yesterday indicated an increase in activity for August, this hasn’t bolstered the Canadian Dollar. Risk sentiment remains negative, with stock markets continuing to decline, driving USD/CAD towards the 1.36 level. Today the Bank of Canada held its meeting and didn’t disappoint, lowering the Overnight Rate for the third time in a row.

Bank of Canada Interest Rate Decision

• Bank of Canada Rate Cut: Overnight rate reduced by 25 basis points to 4.25%, down from 4.50%.
• Market Expectations: 76% chance of a 25 bps cut, 24% chance of a 50 bps cut.
• U.S. Economic Growth: Stronger-than-expected growth driven by consumption, but with a slowing labor market.
• Inflation Trends: Inflation in the U.S. and Europe continues to moderate.
• Canadian Economic Activity: Preliminary indicators show soft economic activity through June and July.
• Labor Market: Continued slowdown in the Canadian labor market.
• Wage Growth: Remains elevated relative to productivity.
• Shelter Price Inflation: High shelter price inflation is the largest contributor to overall inflation but is starting to slow.

Macklem’s Opening Remarks:

A Meeting-by-Meeting Approach by the BOC

In his opening remarks, Macklem emphasized a cautious, meeting-by-meeting strategy for monetary policy decisions. He noted that both headline and core inflation have continued to decrease as anticipated, reflecting overall economic weakness. However, persistent pricing pressures in sectors like shelter and other services are keeping inflation elevated.

Canada Economic Growth and Inflation Dynamics

Macklem expressed optimism that as inflation nears the target, economic growth will pick up, helping to absorb the slack in the economy and allowing inflation to stabilize around the 2% target. He acknowledged that if inflation continues to decline significantly in line with the Bank’s July projections, there could be room for further policy rate reductions.

Balancing Risks and Future Outlook for the Canadian Economy

While Macklem noted that business layoffs remain moderate and hiring has slowed, he also highlighted the importance of guarding against the risk of an overly weak economy leading to inflation falling too much. He stressed the need to carefully weigh the conflicting factors influencing inflation, particularly given recent data that suggest considerable downside risks to the expected economic growth in the latter half of the year.