The Canadian Dollar (CAD) took a significant dive on Tuesday, inching closer to the critical 1.4200 level against the US Dollar. Investors are increasingly bearish on the Loonie as the Bank of Canada (BoC) is widely expected to implement a substantial 50 basis point rate cut this week.
A Weakening Canadian Economy
Canada’s economic landscape is currently fraught with challenges. The recent surge in the Canadian Unemployment Rate to multi-year highs has provided the BoC Governor Tiff Macklem with ample justification for further monetary easing. The central bank’s primary goal is to stimulate the housing market, a crucial sector that significantly contributes to the nation’s economic growth.
Interest Rate Differential Widens
The widening interest rate differential between the US and Canada is a key driver behind the CAD’s weakness. As the Fed is poised to maintain a more hawkish monetary policy stance, the appeal of the US Dollar has increased, further pressuring the Loonie.
Market Outlook
The market consensus leans towards a 50 basis point rate cut by the BoC on Wednesday, which could potentially push the main reference rate down to 3.25%. Meanwhile, investors are eagerly awaiting the release of the US Consumer Price Index (CPI) data on the same day. A softer-than-expected inflation reading could reinforce expectations for a third consecutive rate cut by the Federal Reserve on December 18.
The USD/CAD pair has surged to a 56-month high, reflecting the significant structural weakness in the Canadian Dollar. The pair is currently trading within a long-term sideways range, but the recent upward momentum suggests a potential breakout to the upside.
As the BoC prepares to deliver a significant rate cut and the US economy continues to show resilience, the Canadian Dollar is likely to remain under pressure in the near term. Traders should closely monitor the release of key economic indicators and central bank decisions for further direction.
