Market Spotlight: How the Bank of Canada interest rate cuts impact the currency exchange market
September 5, 2024
As the Bank of Canada announced another cut to interest rates today, what is the expected impact on the currency exchange market? Is there one? And what should businesses do to plan for upcoming foreign exchange needs?
At VBCE, we closely watch the currency exchange market since it is the core of our business. As announcements from the Bank of Canada happen, as we saw this summer and now in September, we observe how the currency exchange markets will respond. No one lever can change rates; it’s a careful balance and ebb and flow of economic considerations from inputs like the labour market, consumer spending, housing pressures and world events, to name a few.
Past pressure on the Loonie with rate announcements
- The Bank of Canada cut rates on June 5, 2024, and we observed the Loonie decrease against the US dollar, which caused a rally in the Canadian stock and bond market. Speculation is that the Loonie is set to strengthen less than expected as rate cuts continue.
- The Bank of Canada cut rates on July 24, 2024, and we observed the Canadian dollar weakening further after the announcement. The Loonie traded down 0.06% to 1.3794 against the US dollar.
With the Canadian economy closely tied to that of the United States, we observe the Federal Reserve, the US central banking system, and how it reacts to economic conditions by either decreasing rates or leaving them unchanged.
The exchange rate between the Canadian and US dollars is very influenced by the policy rates on each side of the border. With too wide a difference, we could see a weakening of the Loonie, which would strengthen the US dollar and move investors looking for better returns to the USD. The impact would make items in the US more expensive for Canadian businesses, which could add risk to the Canadian economy.
What’s next for USDCAD exchanges
Heading into the Bank of Canada’s September announcement, we saw the USDCAD holding within a 1.3452-1.3487 range at the end of August, which was a nearly seven-month low. As Canada announces its third rate decrease of 25 basis points this year, based on inflationary forces cooling on both sides of the US and Canadian border, we await the US Fed announcement on September 18, 2024, to observe any additional impact.
According to Routers, watchers are increasing their expectations on the US Fed cut. The prediction is 200 basis points over the next year (2025), which would bring the rate down to 4.25% at the end of a 12-month period. The expectations for the Bank of Canada are expected to bring rates down to 3.75% by year-end (2024).
Planning for Fall Currency Exchange Needs
After reviewing the last interest rate announcements, we consider how the stock and bond markets will react and whether the continued softening of the Loonie will continue.
We asked VBCE Trader, Garo Mavyan, what he expects as we see interest rate decrease based on his experience, and what advice he'd give to business owners who have USD to CAD currency exchange needs coming up this Fall:
Overall, my opinion is that what the market is seeking in Canada are rate cuts and so there is a lot of pressure on the Bank of Canada to deliver this. If the bank continues on its path of cutting rates (as is expected) I think the market will react positively to that and we might see some broad strengthening in the CAD compared to the USD and perhaps the other major currencies. For our clients that are selling USD to CAD, that could be unbeneficial as a stronger Loonie would cost more Greenbacks to buy. However, I feel one lingering factor will be the pace and timing of these rate cuts compared to the US Fed. If the Bank of Canada continues to strongly outpace the US Fed in rate cuts (with the Fed only delivering its first rate cut potentially as early as this month), it could hurt the Loonie against the Greenback in the long-term as investors seek better returns on their capital investments in the US. For a seller of USD, this would be a great outlook for the remainder of 2024 and early-to-mid 2025. As with all things forex, it’s highly unpredictable and we will have to wait to see how inflation, unemployment and other market factors play out in the coming months. - Garo Mavyan, Trader
While no one knows what the future looks like, our Traders leverage their vast expertise and knowledge of the markets to help guide businesses as decisions for foreign payments and income need to be made. Timing transfers is part of managing the foreign exchange risk of a company, and our Traders work with clients daily to help them understand current market forces to understand market conditions better.