Buying AUDCAD on expectations of imminent monetary policy easing by Bank of Canada

25 January 2024 103
Buying AUDCAD on expectations of imminent monetary policy easing by Bank of Canada

As it was mentioned in the previous forecasts, the monetary policies of the central banks of Canada and Australia are now aimed in different directions. The Bank of Canada is inclined towards policy easing, while the RBA is inclined towards maintaining its restrictive conditions.

Just yesterday, as a result of its January meeting, the Bank of Canada kept the rate unchanged at 5% and for the first time explicitly stated that it would not have to raise it again if the economy performs as it forecasts. The data show that economic growth has stalled and will remain slow in the near term, which will help bring inflation back to the bank's target of 2% next year.

Bank of Canada officials believe that previous rate hikes totaling 475 basis points in less than two years are sufficient to curb inflation. This could provide an opportunity for rate cuts in the coming months.

The Governor confirmed the need to balance the risks of excessive and insufficient rate tightening. The bank removed from its previous policy statements the assertion of its willingness to raise rates again.

Removing the threat of another increase from the policy statements clearly signals that rate hikes are over, said Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal.

The Bank of Canada is not ready, willing or able to cut interest rates yet, but it has given some hints that it could happen later this year, stated Avery Shenfeld, an economist at Canadian Imperial Bank of Commerce.

Shenfeld said the governor's comments represent a dovish tone but remain consistent with CIBC's call for the first rate cut in June, as well as a 150-basis-point rate cut this year.

Wage growth, which is still at 4–5% a year, is expected to slow in line with inflation and moderate productivity growth, according to the bank statement.

Canada's economy is more rate-sensitive than its peers because of its higher debt load and shorter mortgages. Most economists believe the Bank of Canada will cut the policy rate by June, and overnight swap traders are making similar bets.

Unlike the Bank of Canada, the Australian regulator is inclined to either tighten or maintain the current tight monetary conditions for as long as possible.

All of the above provides the ground for the AUDCAD pair’s strengthening.

The overall recommendation is to buy AUDCAD with the target at 0.9200.

A Stop-loss could be set at the level of 0.8500.

This content is for informational purposes only and is not intended to be investing advice.

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