Inavesting.com -- The Canadian dollar has underperformed compared to other pro-cyclical currencies since the beginning of May, influenced by its connection with US economic data and Federal Reserve rate expectations. Market analysts have predicted a 25 basis point rate cut by the Bank of Canada in June, a stance that has been maintained for several months. This anticipated policy action is expected to diminish the Canadian dollar's appeal relative to other commodity-linked currencies.
The proximity of inflation to the target has been a primary argument supporting the potential rate cut in June. However, a surge in job creation in Canada in April has challenged the dovish outlook. Today's release of April's Consumer Price Index (CPI) data in Canada is crucial, as it may affect market predictions regarding the June interest rate decision. Analysts are particularly interested in whether the core CPI "trim" measure will align with the other Bank of Canada's preferred core inflation indicator, the "median," falling below 3%. If all the key inflation metrics, both core and headline, are within the 1-3% target range, it could complicate the Bank of Canada's rationale for maintaining a restrictive monetary policy.
The market is seemingly underestimating the likelihood of a rate cut in June, with only an 11 basis point adjustment priced in. There is also speculation that the Canadian dollar could weaken further as the potential rate cut becomes more fully anticipated by the market, leading to increased dovish positions on the Canadian interest rate curve. Should inflation decline as expected with today's data, the USD/CAD pair might approach the 1.3700 level again in the near term. Currency pairs such as CAD/NOK and NZD/CAD could also reflect the policy divergence more clearly.
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