Image © Bank of Canada
CAD can extend recent gains against the GBP, EUR and USD.
The Bank of Canada put the wind in the Canadian Dollar's sails by opting to keep interest rates on hold, confirming it is close to ending a multi-month interest rate cutting cycle.
The hold follows a similar decision in April, suggesting the Bank has ended the cutting process ahead of other peer global central banks, which can support Canadian bond yields and the domestic currency.
The Bank has delivered seven consecutive cuts this cycle, which started in June 2024 and ended in March, taking the policy rate from 5% to 2.75%.
The Pound to Canadian Dollar exchange rate extends a pullback that has been underway since May 28 following the decision, reaching 1.8553. Against the U.S. Dollar, the Loonie is 0.40% stronger (USD/CAD down 0.40% at 1.3667.
Although developments are supportive of CAD in the near term, Governor Tiff Macklem would not rule out further interest rate cuts in prepared comments released following the decision, confirming that the Bank would remain vigilant to developments in a highly uncertain geopolitical and macroeconomic environment.
"Our base case expectation is for further weakness in the economy to arrive over the coming months, which should, along with a renewed moderation in inflation rates, give policymakers room to deliver more easing," says Karl Schamotta, FX analyst at Corpay.
Above: CAD has risen against all G10 peers in the past week.
If the market begins to reprice a resumption of further rate cuts, the CAD can come under pressure again, allowing the likes of GBP/CAD to press fresh highs in H2 of this year.
Schamotta thinks the tone of the BoC's guidance is erring on the cautious side, given global and domestic trends, which will need to be addressed via lower interest rates.
"The dovish bias expressed thus far should help to keep rate differentials, and the loonie, contained for now," he says.
Hints that the Bank of Canada will go again include Macklem's observation that "On balance, members thought there could be a need for a reduction in the policy rate if the economy weakens in the face of continued US tariffs and uncertainty, and cost pressures on inflation are contained".
He also opined that domestic economic growth in the first quarter of the year (2.2%/y annualised) borrowed "strength from the future," with households and businesses "likely to remain cautious, suggesting domestic spending will remain subdued."
For sure, there is significant uncertainty, which gives the Bank of Canada reason to pause and could ultimately mean the pause is extended. In particular, it sees risks and uncertainties related to higher U.S. tariffs that could reduce demand for Canadian exports.
"How much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve," says the Bank.
The CAD is defying the dovish tones, suggesting forex players see any further cuts as being limited. It will take a marked downstep in the data to really rev up the rate cut bets and put the Loonie on the backfoot once more.