Anticipated rate cuts by the BoC could push the loonie to a historic nadir
The Canadian dollar may face additional downward pressure as the Bank of Canada (BoC) prepares to announce a widely anticipated rate cut, further widening the interest rate gap with the U.S. Federal Reserve. Shaun Osborne, chief FX strategist at Scotiabank, warns that the loonie could drop to 69 cents U.S., with trade and economic challenges expected to persist into next year.
The BoC is expected to lower its key policy rate by 50 basis points on Wednesday, according to Osborne and other economists. If the move happens, it would expand the interest rate differential with the Federal Reserve to 125 basis points, a significant disadvantage for the Canadian dollar.
“It’s a big rate disadvantage for the Canadian dollar [and a] big rate advantage generally for the U.S. dollar,” Osborne told BNN Bloomberg. He noted that the U.S. dollar has benefited from stronger growth and adjustments in expectations for Federal Reserve rate cuts since September.
Typically, the interest rate gap between Canada and the U.S. has hovered around 75 basis points, Osborne said. However, it has recently surpassed 100 basis points due to differences in the timing of policy decisions. A 50-basis point rate cut by the BoC, coupled with an expected 25-basis point cut by the Fed next week, could cement a 125-basis point gap.
Osborne added that while the BoC is making “pretty good progress” toward neutral policy, the Federal Reserve’s rate reductions are likely to proceed more gradually, keeping the Canadian dollar under pressure in the near term.
The Loonie could face even more challenges in 2024. Osborne pointed to potential trade frictions and tariffs as factors likely to weigh on Canada’s economy: “Our forecast is probably centered on that 69-cent area with the risk of an overshoot to that point. Given the challenges that we’re going to have in Canada next year, we know tariffs are coming in some form probably not 25%, hopefully. But we know there’s going to be some trade friction.”
The BoC’s rate decision on Wednesday is expected to play a key role in shaping the Canadian dollar’s performance in the months ahead.
