Bank of Canada cuts rates by 25bp | articles

We have been calling for CAD’s weakness in the crosses for the past 1-2 months ahead of this June BoC meeting. As markets gradually increased bets on a cut, CAD showed the kind of underperformance versus other pro-cyclical currencies we were expecting. At the time of writing, the loonie is trading around 0.3% weaker against the dollar.

The post-BoC price action got mixed up with stronger-than-expected US ISM numbers, but CAD only dropped moderately after the rate cut. This is not only because markets were pricing in 20bp into the meeting, but also as the statement did not really give any strong hint on the path for future rate cuts. The pledge to move “one meeting at a time” and the expectation for more rate cuts were partly offset by concerns about the “uneven” disinflationary path and the acknowledgement that cutting too fast is dangerous. From a market perspective, this looks like a “cautious” cut, a nudge more dovish than a “hawkish” cut, which would have probably required stronger wording on a pause after the June move.

With the BoC moving in line with our forecasts, and our expectations of an additional 75bp of easing this year (around 47bp priced in), we still think CAD looks less attractive than other high-beta currencies such as NOK, AUD and NZD, where domestic central banks should wait until at least the last quarter of the year before starting to cut rates. USD/CAD short-term risks are moderately skewed to the upside, but in line with our call for US data to start pointing to a September Fed cut, the pair can still find its way into 1.35 in the second half of the year.