This afternoon UK time, there is a good chance that the Bank of Canada (BoC) will become the second G10 central bank after the Swiss National Bank (SNB) to cut interest rates for the second time in the current cycle, Commerzbank FX strategist Michael Pfister notes.

BoC to cut interest rates for the second time

“The seasonally adjusted monthly rates of change, which have since been in line with the inflation target, and the continued weakness of the Canadian real economy support this view. Accordingly, the market has almost fully priced in the rate cut, and the Bloomberg consensus is clearly leaning towards another rate cut – including us.”

“Despite this accelerating turnaround in interest rates, the CAD has performed reasonably well in recent weeks. At first glance, this may seem surprising. However, Canadian inflation expectations have fallen sharply on the back of the latest figures, allowing the Canadian real interest rate to keep pace with its US counterpart. This is a factor that is currently supporting the CAD.”

“However, inflation expectations are unlikely to fall much further. Expectations are already lower than in the US or the euro area. If the BoC continues to cut rates, real interest rates are likely to fall at some point. Therefore, it is particularly important today to pay attention to the new forecasts and communication. If the forecasts point to further (larger) rate cuts, the CAD is likely to suffer.”