Weak Cad Will Not Stop Boc Divergence

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Weak Cad Will Not Stop Boc Divergence

Weak Canadian Dollar Not Enough To Stop Boc Divergence

The Bank of Canada is expected to go ahead with 3 rate cuts in this 2024, ahead of the first move from the Federal Reserve.

According to experts, the central bank will go ahead with its plan before the weakness in the CAD end up mesing the inflation outlook.

Since the start of this year, CAD has been on the back foot against the USD, which has raised concerns about how far the BoC is willing to diverge from the Fed.

Boc To Cut Rates From June/July

Given the circumstances, many investors believe that the BoC will start cutting rates in June or July 2024. However, the upcoming Canadian inflation reading will serve as the key input for this decision.

While the BoC is expected to move with rate cuts in the next 1-2 months, the Federal Reserve will likely wait till September to get more confirmation on the disinflation trend.

For now, the benchmark rate of BoC is 5%, which is still 38 bps lower than the midpoint of the Fed's policy rate. So, any rate cuts from the BoC cut widen the divergence as the Fed is still not ready to go ahead with rate cuts.

Still, some experts believe a major move in the currency is needed to increase the import costs. Only then, the bank's efforts to bring down the inflation towards 2% target will be at risk.

An increase in the cost of imported products means the business will have to charge more money to the customers. The end result will be an uptick in the Canadian inflation.

Now, the major question is how much the BoC is willing to go ahead with policy divergence. For now, there are not that many things which can prevent the BoC from doing so!

There's no doubt that the USD/CAD will turn higher if the interest rate difference between the two currencies widens even further.

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