Canadian Dollar Today: Bank of Canada Deliver a 50bps Cut Amid Growth Concerns

October 24, 2024 - Written by David Woodsmith

STORY LINK Canadian Dollar Today: Bank of Canada Deliver a 50bps Cut Amid Growth Concerns

After three 25bps cuts, the BoC decided to accelerate the easing cycle and deliver a 50bps cut.

With disinflation overshooting the 2% target to 1.6%, the bank is now clearly focused on supporting the economy.

Another cut is likely in December, although it is not clear whether it will be 25bps or 50bps.

Stock markets rolled over on Wednesday as jitters over the US election finally came to the fore. Betting markets show Trump with a clear lead, but polls remain mixed and the vote may well come down to a handful of swing states. There is also some trepidation over how the result will be received. Re-counts and civil unrest like the 2020 election might repeat.

The US dollar strength continued and EURUSD fell below 1.08 to 1.076 in Wednesday’s session. USDJPY made the largest move and is now nearly 10% higher from the September low. Some commentators are starting to speculate whether the BoJ will step in and try and support the yen again.

Elsewhere, the Bank of Canada stepped up its easing cycle and delivered a 50bps cut, in line with market expectations. Rates are now 3.75% after peaking at 5.0% last year. Clearly, they are in a rush to get to the neutral rate and support the economy before it rolls over into recession.

Bank of Canada Goes Big

The consensus view was the BoC would deliver a 50bps cut, but there were some doubts as the bank has already cut in June, July and September. They have now eased 75bps more than the Fed and 100bps more than the BoE. So, what’s the hurry?

“We had some doubts the BoC would go ahead with a half-point move today as the labour market printed strong gains in September with the unemployment rate inching lower. However, Macklem looked through those September numbers and stressed during the press conference how the labour market is “soft” and the economy is in “excess supply,”” noted ING following the meeting.

This was another case of a central bank frontloading the cutting cycle to ensure the economy stays steady. Or as Governor Macklem put it, “we need to stick the landing” (in reference to a soft landing for the economy).

Certainly, inflation is no longer a concern and with CPI at just 1.6%, there is a risk it may overshoot to the downside. The BoC has therefore shifted to growth matters.

GDP figures were revised slightly lower to project and end of year reading of 1.8%. Obviously, they think the cuts will have the desired effect as growth projections in 2025 were revised higher. Inflation is also expected to rise back to 2.0% and stay around that level in 2025.

This is perhaps an optimistic view, but is the only real forward guidance the bank will provide. Governor Macklem stayed tight lipped on the next rate cut and markets are already speculating they may cut another 50bps in December.

“Macklem dodged a question on a 50bp cut in December at the press conference, and the BoC’s approach remains a data-dependent, meeting-by-meeting one. That means incoming figures on inflation, labour and growth will all contribute heavily to drive market expectations for December. The next key releases are August’s retail sales on Friday and the GDP report (also for August) on 31 October,” continued ING.

Another 50bps cut would take rates to 3.25%, which is assumed to be around neutral. Whether it comes in December or early next year is perhaps a moot point – it is clearly where the BoC are targeting and they are in a hurry to get there.

The situation is clearly negative for the Canadian Dollar, although it has held up fairly well against most other G7 currencies apart from the rampaging US dollar. EURCAD is trading at the lows of a large 1.48-1.52 range which has persisted since early August.

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TAGS: Canadian Dollar Forecasts