Inavesting.com — The Canadian dollar has underperformed against other procyclical currencies since early May, driven by the correlation with U.S. economic data and Federal Reserve interest rate expectations. Market analysts are predicting a 25 basis point rate cut by the Bank of Canada in June, a position that has been maintained for several months. This expected policy action is expected to reduce the appeal of the Canadian dollar against other commodity-linked currencies.
The proximity of inflation to the target was an important argument in support of the possible rate cut in June. However, Canada’s strong increase in job creation in April has tested the easing outlook. Today’s Consumer Price Index (CPI) data in Canada is critical as it could impact market forecasts for the June interest rate decision. Analysts are particularly interested in whether the core CPI ‘trim’ measure will align with the other Bank of Canada’s core inflation indicator, the ‘median’, which will fall below 3%. If all major inflation metrics, both core and headline inflation, fall within the 1-3% target range, this could complicate the Bank of Canada’s reasoning for maintaining a restrictive monetary policy.
The market appears to be underestimating the likelihood of a rate cut in June, with only an 11 basis point adjustment priced in. There is also speculation that the Canadian dollar could weaken further as the market better anticipates the potential rate cut, leading to increased dovish positions on the Canadian yield curve. Should inflation decline as expected based on today’s data, the pair could approach the 1.3700 level again in the near term. Currency pairs such as and could also reflect policy differences more clearly.
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