9 September 2024
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HSBC prepared this video based on the information that it believes to be reliable at the time of shooting. However, the FX market moves very quickly and the views presented in the video may no longer be up-to-date and are subject to change without notice. The content of the video does not constitute a solicitation nor recommendation for any transaction or making any deposit or investment. Please contact your Relationship Manager for our most updated FX views and publications.
On 4 September, the Bank of Canada (BoC) cut its policy rate by 25bp to 4.25%. This was the third consecutive cut and came in line with market expectations. In his opening remarks, BoC Governor Tiff Macklem made it clear that the central bank will be taking each decision as it comes in the coming months, assessing the various factors driving inflation. He said the central bank cares as much about inflation being below the target as it does above, and he also added both a pause in monetary easing and a cut by 50bp are possible (Bloomberg, 5 September 2024). That being said, the overall communication suggests more rate cuts are coming. Markets currently expect at least two additional 25bp cuts by the end of 2024 (Bloomberg, 5 September 2024), while our economists expect only one additional 25bp cut this year, followed by 75bp of easing in 2025.
For the CAD, one notable development is that the currency has strengthened by more against the USD than would be consistent with the prior relationship between FX and the rate differential (Chart 1). As the BoC just delivered what markets expected in September, focus will likely shift to the Federal Reserve’s (Fed) announcement on 19 September (2:00am HKT). Markets expect the Fed to cut rates by at least 25bp, with an about a 40% chance of a larger 50bp cut in September (Bloomberg, 5 September 2024). If markets pare US rate cut expectations, the USD is likely to recover some lost ground, thereby weighing on the CAD.
Source: Bloomberg, HSBC
Source: Bloomberg, HSBC
One explanation for the gap between rates and FX for Canada is that the CAD has become beholden to risk appetite which we use S&P 500 Index as a proxy (Chart 2). Equity market weakness in recent days has weighed on the CAD, as perhaps has the sharp drop in oil prices. Over the near term, any hawkish shift in Fed expectations that might undermine risk appetite could expose the CAD to vulnerability (which is similar to our concerns around the GBP – see FX Viewpoint “GBP: Running out of steam” for details).
With this in mind, a less dovish Fed could see the CAD weaken over the near term through both the rates and risk appetite channels.
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