CAD: Macklem turns dovish
The Canadian dollar is lagging other pro-cyclical currencies at the start of this week after Bank of Canada Governor Tiff Macklem said in a TV interview yesterday that he expects rates to be cut next year. This is a surprise statement by Macklem, who only two weeks ago reiterated the hawkish bias in the BoC policy statement. Offering a timeline for rate cuts appears inconsistent with the BoC's claim that it “remains prepared to raise the policy rate further if needed” and likely validates the market’s pricing for 100bp of easing next year – despite Macklem’s caveats on the disinflation progress.
Despite our view of a dollar decline and outperformance of pro-cyclical currencies next year, we expect the Canadian dollar to underperform other commodity currencies as the BoC cuts rates aggressively (we estimate 150bp in 2024) on a grim economic outlook and as the loonie suffers from its correlation with US economic data.
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