As the Bank of Canada (BoC) prepares for its upcoming July meeting, the financial world is abuzz with speculation about potential policy shifts. Bank of America (BofA) is among those expecting another rate cut, citing subdued inflation and declining inflation expectations as key factors justifying this move. Despite differing opinions among economists, BofA maintains a clear stance, forecasting that the USD/CAD currency pair will remain supported above 1.36 in the near term but could see a slight decline by the end of the year as U.S. economic data softens and triggers Federal Reserve rate cuts.

Market Expectations: Shifting Probabilities

• Rate Cut Probability: Throughout June and early July, the rates market showed a 50-60% chance of a BoC rate cut at the July meeting.
• Post-CPI Data Shift: Following the release of June’s CPI data, which confirmed subdued domestic inflation, market pricing for a July rate cut surged to 90%. This significant jump underscores the impact of recent inflation data on market expectations.

Economists’ Forecasts: A Divided Landscape

• Split Opinions: Economists are divided regarding the BoC’s next move. Some predict a rate cut, while others anticipate that rates will be held steady in July.
• BofA’s Perspective: BofA aligns with the rate-cut proponents. They argue that the subdued CPI and declining Q2 inflation expectations provide sufficient grounds for the BoC to continue its rate-cutting trajectory.

USD/CAD Outlook: Near-Term and Year-End Projections

• Near-Term Support: BofA expects the USD/CAD pair to remain supported above 1.36 in the short term, primarily due to the anticipation of another BoC rate cut.
• Year-End Forecast: Looking further ahead, BofA predicts the USD/CAD will hover around 1.36 through Q3, eventually dipping to 1.35 by year-end. This forecast hinges on the assumption that U.S. economic data will weaken, prompting the Federal Reserve to cut rates in the second half of the year.

Navigating Subdued Inflation and Market Dynamics

Bank of America anticipates a rate cut from the Bank of Canada at its upcoming July meeting, driven by subdued inflation and falling expectations. In the near term, they expect the USD/CAD to remain supported above 1.36 due to the headwinds from an imminent rate cut. However, by year-end, they forecast a modest decline towards 1.35, assuming a softening in U.S. economic data that leads to rate cuts by the Federal Reserve.

As we approach the BoC’s July meeting, the financial markets will be closely watching the central bank’s decision and the implications it will have on the USD/CAD pair. BofA’s insights provide a clear framework for understanding the potential outcomes and market reactions in the months ahead.