The Canadian Dollar (CAD) has entered a consolidation phase against the US Dollar (USD) following a volatile week.
While a soft US inflation report initially put the Greenback on the back foot, the Bank of Canada’s (BoC) decision to keep its interest rate at 2.25% for a sixth consecutive meeting has somewhat tamed the initial downward move in the USD/CAD pair
Institutional analysts are closely examining the Canadian central bank’s updated forecasts and shift in guidance to map out the next directional leg for USD/CAD. Cooling growth and excess supply challenge aggressive hike pricing BBH emphasizes that Canada’s cooling economic momentum suggests that the central bank is in no rush to pursue further interest rate hikes. Under updated projections, real GDP growth is expected to decelerate from an annualized 2.5% in the second quarter to a more modest 1.5% in the third quarter.
With core inflation comfortably hovering around 2%, current market expectations of 50 basis points of policy tightening over the next 12 months appear highly overextended. There is room for BoC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD as the Canadian economy remains in excess supply. Softened BoC guidance limits immediate Loonie catalyst The macro research team at TD Securities points out that the BoC’s newly watered-down forward guidance offers little spark to ignite a Canadian Dollar rally.