- Bank of Canada cut rates to support the economy
- We see further downside in CAD
The Bank of Canada cut rates by 25bp to 0.5% to support the economy. The economy probably “contracted modestly“ in the first half of this year, policy makers said. “The lower outlook for Canadian growth has increased the downside risks to inflation”. This move was not fully priced in by financial markets. As a result, the Canadian dollar tumbled; USD/CAD moved above 1.29.
In our FX Watch on Monday – More bearish on the CAD, we highlighted the risk that the Bank of Canada might cut rates this week. We also became more bearish on the Canadian dollar. We expect USD/CAD to reach 1.32 at the end of this year and 1.37 at the end of next year. We judge that investor positioning in financial markets are currently not at extreme levels.