Quick Look:
- April’s CPI forecast suggests a 2.7% year-on-year increase, down from March’s 2.9%.
- Lower CPI might ensure a June rate cut, while higher inflation could delay it to July.
- The US dollar weakened due to revised Fed outlooks, with less likelihood of rate cuts in 2024.
The US dollar opened the week with losses from Friday amidst statements from prominent Federal Reserve officials. Notably, Fed’s Mester has revised her outlook, no longer anticipating three rate cuts 2024. Meanwhile, the Canadian dollar traded quietly in the early hours of Monday, sliding to 1.3580 in thin trading sessions. The primary focus for traders remains the domestic inflation report, which is expected to show a 0.5% month-on-month increase, consistent with March’s figure, and a 2.7% year-on-year rise.
The potential outcomes of the inflation data are crucial. Should the CPI figures come in lower than expected, it would almost guarantee a rate cut in June. Conversely, higher-than-forecast inflation might delay the first rate cut to July. Additionally, the recent April 1 carbon tax hike is another factor that could push inflation higher than anticipated, thereby supporting the Canadian dollar.
USD/CAD Opens at 1.3630 Amid BoC Rate Cut Speculation
The Canadian dollar opened at 1.3630, moving within an overnight range of 1.3622 to 1.3644. Later, it closed slightly lower at 1.3619. The Canadian dollar weakened below 1.3650 during the early European session on Wednesday. However, there is increased speculation of a BoC rate cut in June, even with softer Canadian CPI inflation data.
April’s CPI data from Statistics Canada indicated an annual rate of 2.7%, down from March’s 2.9%, with a monthly rate holding steady at 0.5%. Core CPI also decreased by 1.6% compared to March’s 2%. This easing inflation data has heightened market speculation about a potential rate cut by the BoC, with bets for June 5 increasing to nearly 55%, up from 39% before the data release. This speculation has put potential selling pressure on the Canadian dollar, acting as a tailwind for USD/CAD.
Fed’s Bostic and Waller Stress Caution on Rate Moves
From a broader economic perspective, Atlanta Fed President Raphael Bostic expressed caution about making the first-rate move, stressing the need to avoid triggering inflation fluctuations. Similarly, Fed Governor Christopher Waller stated that several more months of positive inflation data are needed before considering a reduction in borrowing costs.
The market performance on Monday reflected the growing anticipation and reactions to economic indicators. The Canadian dollar slipped by 0.2% against the US dollar, reaching 1.3675 CAD/USD, marking its weakest level in a week. The slowdown in inflation and the rising speculation of a rate cut influenced this decline. Oil prices also experienced a drop, falling by 0.7% to $79.26 per barrel, which further weighed down the Canadian dollar due to Canada’s reliance on oil exports. Bond yields also decreased, with the 10-year yield easing by 4.9 basis points to 3.576%.
Canadian Dollar Faces Pressure Amid Global Monetary Shifts
Looking ahead, the Canadian dollar may face continued selling pressure unless there is a notable slowdown in the US economy. The narrowing spread between Canadian and US 10-year bond yields, currently at 84 basis points, will be a key indicator to watch. Analysts will closely monitor for signs of a US economic downturn, which could impact global financial markets.
In the global context, Canada’s potential rate cuts could signal a broader shift in global monetary policies. Decisions by major central banks will have far-reaching implications, affecting global trade, investment flows, and currency markets. The financial community will closely watch these developments unfold, assessing their impact on the broader economic landscape.
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