Canadian Dollar Weighed by Macklem Comments

Above: File image of BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing.

The Canadian Dollar starts the new week under pressure owing to a sharp fall in the U.S. Dollar and growing odds of a large 50 basis point cut at the Bank of Canada.

"Bigger rate cuts are clearly on the table," says Karl Schamotta, Chief Market Strategist at Corpay.

Schamotta cites an interview in the Financial Times over the weekend where Governor Tiff Macklem said, "As you get closer to the target, your risk management calculus changes. You become more concerned about the downside risks. And the labour market is pointing to some downside risks".

Macklem argued there is "enough slack" in the economy to bring inflation down, "suggesting that officials could switch to cutting rates in 50 basis-point increments in coming months if growth undershoots their forecasts," says Schamotta.

Markets have 74 basis points in easing priced in before year end, implying at least one jumbo-sized move in October or December.

The Canadian Dollar has come under hefty selling pressure at the start of the week as it tracks a selloff in the U.S. Dollar, which is linked to growing odds of a 50 basis point interest rate cut at the Federal Reserve on Wednesday. "Should the Fed cut 50, this may also raise the risk of the BoC following suit," says Justin McQueen, a Reuters market analyst, adding "there is a scope" for further CAD downside.

Markets saw only 30% odds of such an outcome this time last week, but these odds now stand at 60% following a series of apparent unofficial media briefings that dropped last Thursday.

The market is betting that such a decisive cut will only improve the odds of the Bank of Canada following suit and suggests CAD's destiny could well depend on the performance of its North America neighbour in the coming weeks.