The Canadian dollar and US dollar (USD/CAD) currency pairing continues to be heavily influenced by interest rate expectations. Specifically, market participants are keenly focused on when interest rate changes will occur. As such, any economic news is primarily viewed through the lens of how it will impact the Bank of Canada and the Federal Reserve’s decisions on when to begin cutting rates.
A case in point is last Friday’s Canadian GDP number. Canada’s GDP grew by a surprising 1% in the fourth quarter of 2023. This relatively healthy level of economic expansion was interpreted by the markets as reducing the likelihood of a rate cut by the Bank of Canada this week.
After a wide range of predictions by economists at the beginning of the year, most credible analysts are now converging around June as the time for the first rate cut by the Bank of Canada. Markets are now predicting an 80% chance of a rate cut in June.
In contrast, markets are predicting an almost certain chance (96%, to be exact) that the BoC will hold rates at this Wednesday’s meeting. As a result, the wording and tone of the statement will be scrutinized carefully for insights into the bank’s next move.
The CAD/USD pairing has been unable to break through the 1.36 ceiling. However, with a week full of significant US and Canadian economic data ahead, the right combination of economic indicators might just push it past the stubborn 1.36 ceiling. Although less likely, there is a possibility that since we have seen inflation slow faster than expected and with GDP numbers weaker than headline figures indicated, the BoC could be laying the groundwork for a potential interest rate cut by leaning slightly towards a dovish tone. This would weaken the Canadian dollar.
