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Most of the world’s leading central banks are set to cut rates in 2024. However, who makes the first move will be important for Forex. Let’s discuss this topic and make up a trading plan for USDCAD.
Weekly Canadian dollar fundamental forecast
Time is running. The Bank of Canada will soon begin cutting the overnight rate from its current 22-year high of 5%. However, this is unlikely to happen at the March 6 meeting. Despite inflation returning to the target range of 1-3%, it is still not anchored, and the economy looks better than in Japan and the UK. So why should Tiff Macklem and his colleagues rush?
Canada avoided a recession in the second half of the year thanks to strong exports. GDP in the fourth quarter increased by 1%, which is higher than expected. The proximity of the US economy, which is surprisingly resistant to the Fed’s aggressive monetary restrictions, played its role. However, Donald Trump’s possible victory in the presidential election, who promised to impose a 10% tariff on all American imports, could harm the Canadian economy.
However, for now, the reduced possibility of a recession and the high growth rate of average wages of 5.3% allow the Bank of Canada to extend the pause to five meetings. The Canadian economy is more sensitive to rate increases than, for example, New Zealand’s. If RBNZ officials turned out to be less hawkish than expected, why shouldn’t BoC act more dovish?
Dynamics of recession probability in Canada
Source: Bloomberg.
19 of 31 Reuters experts forecast Ottawa’s first monetary easing by 25 bps to 4.75% in June. Seven believe that it will begin in the second half of the year, and five are betting on April. Experts warn that a premature reduction in the overnight rate will be a bigger mistake than keeping it unchanged at 5% for a longer period of time. The derivatives market gives a 30% chance for September, a high probability for June, and is confident of the start of monetary expansion in July.
Thus, both experts and markets believe that Bank of Canada officials will not rush. They will make their first move in the same month as the Fed and will continue at the same speed thereafter. This does not give an advantage to either USDCAD bulls or bears. Will the US economy maintain its strength or begin to cool? This question will be fundamentally important for the pair.
In the first case, the timing of the Fed’s monetary expansion will shift to later dates. It is possible that a new round of inflation will lead to arguments that rates will not have to be reduced at all. The release of US employment data, CPI, and PCE will clarify the picture.
Weekly USDCAD trading plan
It is unlikely that the Bank of Canada will surprise financial markets with anything and provoke serious changes in USDCAD. The same goes for the Canadian jobs report. The February US nonfarm payrolls data is another matter. A strong increase in the indicator against the backdrop of a steady increase in average wages may cause the USD to continue its rally against its CAD in the direction of the previously mentioned targets at 1.366 and 1.371. I recommend holding and adding up to long trades.
Price chart of USDCAD in real time mode
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