The Canadian dollar is expected to recover! HSBC says Bank of Canada may give up prematurely cutting interest rates in June

foreign exchange documentary platform- Gary Howes, a foreign exchange analyst, wrote that if market expectations for a June rate cut by the Bank of Canada fade in favor of a first rate cut in July, the stressed Canadian dollar could recover.

The next two decisions of the Bank of Canada will be held on June 6 and July 11.

The Bank of Canada is abandoning its June interest rate cut simply because it does not want to deviate from the Federal Reserve, which is expected to cut rates later this year, according to a new analysis by HSBC.

Ryan Wang, US economist at HSBC, said: "While many central banks have taken cues from the Fed, the Bank of Canada's policy rate path is particularly closely tied to the Fed. Uncertainty around the Fed could prompt the Governing Council to be more cautious in cutting rates."

If you consider Canada alone, the case for a rate cut in June is strong: underlying disinflation continues to progress, economic growth is slow, and productivity remains relatively low.

HSBC said the June rate cut remains a close call, but concerns that incongruity with the Federal Reserve will prompt the Bank of Canada to delay a rate cut.

HSBC U.S. economist Ryan Wang explained that the Canadian and U.S. economies are closely related to trade and investment, and the excessive divergence between the path of the Federal Reserve and the Bank of Canada could have a greater impact on the Canadian economy than elsewhere.

This view was echoed by Bank of Canada Governor John McLeam in a recent speech, which explains why the Canadian dollar tracks the dollar's fate for much of 2023 and early 2024.

Ryan Wang, US economist at HSBC, said: "The Fed's expectations have changed recently. With annual core personal consumption expenditures inflation barely changing over the past four months, Fed Chairperson Jerome Powell noted at his FOMC press conference in May that confidence in US inflation has not improved. We now expect the Fed to cut rates for the first time in September."

He added: "Given the progress of domestic inflation, we continue to believe that there is a case for the Bank of Canada to start cutting rates earlier than the Fed and at a slightly faster pace. We now expect the Bank of Canada to cut rates by 25 basis points for the first time in July, another 25 basis points in the fourth quarter of 2024, and a cumulative 75 basis points in 2025."

Dollar/Canadian Dollar Daily Chart

At 11:13 on May 28, Beijing time, the US dollar was trading at 1.3617/18 against the Canadian dollar.