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Jun 03 - 12:55 PM

BofA: We Expect Short-Term Knee-Jerk USD/CAD Rally Should June BoC Rate Cut Play Out This Week

By eFXdata  —  Jun 03 - 10:45 AM

Synopsis:

Bank of America (BofA) forecasts a potential knee-jerk rally in the USDCAD if the Bank of Canada (BoC) proceeds with a rate cut as anticipated this week. Despite positive growth data year-to-date, Canada’s negative output gap trends and cooling inflation make a compelling case for a rate reduction, according to BofA's analysis.

Key Points:

  1. BoC Rate Cut Anticipated: BofA economists expect the BoC to initiate a 25 basis point rate cut this week, marking the start of Canada's rate-cutting cycle.

  2. Market Pricing and Timing: Market consensus has fluctuated between a 50-60% likelihood of the rate cut occurring in June versus July. Confirmation of the cut in June could prompt a short-term USDCAD rally.

  3. Impact on USDCAD: Should the rate cut be enacted as anticipated in June, BofA predicts a short-term rally in USDCAD towards 1.38. For Q2 2024, their forecast path places USDCAD at 1.37, dropping to 1.35 by year-end.

  4. Monetary Policy Divergence: A June rate cut by the BoC would highlight the short-term monetary policy divergence with the Federal Reserve, likely supporting USDCAD above the 1.36 mark until a Fed rate cut appears more imminent later in the year.

Conclusion:

Bank of America anticipates a temporary rally in USDCAD contingent on a June rate cut by the Bank of Canada, supported by underlying economic indicators and monetary policy expectations. The potential rate cut is seen as a validation of short-term monetary divergence between Canada and the U.S., influencing currency dynamics.

Source:
BofA Global Research

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