CAD Outlook and Strategy

Published on - June 2024

Navigating The CAD Landscape: Key Insights

  • Bank of Canada Interest Rate Cuts: In June 2024, the Bank of Canada cut its key interest rate by 25bps to 4.75%, responding to a decrease in the annual inflation rate to 2.7% in April. This decision aligns with the central bank’s expectation that inflation will continue to ease, necessitating further rate cuts. The Bank of Canada maintains a positive outlook on disinflation converging toward the target of 2%.

  • Economic Growth: Canada’s economy exceeded expectations in Q1 2024, growing by 0.4% against a forecast of 0%. This growth was driven by a revival in domestic demand and a sharp increase in retail sales, which rose by 0.7% in April. Despite this economic growth, high interest rates have dampened discretionary spending, weakening the housing market. Home prices fell by 0.2% in May, and home sales dropped by 0.6% from April.

  • Trade Balance: The trade deficit in Canada narrowed significantly to CAD 1.05 billion in April 2024 from CAD 2 billion in March. This improvement was due to a 2.6% rise in exports, particularly in energy products and unwrought gold, while imports increased by 1.1%. However, the current account deficit widened to CAD 5.4 billion in Q1 2024 from CAD 4.5 billion in the previous period, mainly due to a shift in the goods balance.

  • Unemployment and Wages: Unemployment in Canada rose to 6.2% in May, the third increase in four months, with 26,700 positions added. Despite this rise, hourly wages for permanent employees increased by 5.2%, higher than expected. The Bank of Canada’s move to a less restrictive policy has been cautious, considering the strong US labor data and rising wages in Canada.

  • CAD Outlook – The BoC’s dovish stance compared to the Fed is expected to weigh on the CAD. Short-term stability in USDCAD is anticipated, with a potential move toward 1.3900 in the medium term. CADINR is likely to range between 60-62.0 short-term, with a bias towards 61.00, and in the medium term, between 61.0-63.00, with a bias for 63.00.

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