Canadian 5 Bank Forecast, October 2024

The Federal Reserve's recent decision to initiate an easing cycle with a substantial 50 basis point rate cut came as a surprise to many analysts, signaling a significant shift in U.S. monetary policy. Chairman Jerome Powell emphasized that future rate cuts will be data-dependent, indicating that the market should not expect a default rate of 50 basis points moving forward. This change marks a thematic shift in the FX markets, suggesting that the period of USD strength that has characterized the post-pandemic era may be drawing to a close. A gradual weakening of the USD is anticipated over the coming quarters, with the DXY potentially returning to its pre-pandemic range of 90-100. In the near term, volatility could increase due to key events in early November, including the final Non-Farm Payrolls report before the Fed's decision, the U.S. elections, and the upcoming FOMC meeting. The major macro events surrounding the election may temper near-term volatility, but depending on the Fed’s guidance and election results, there could be conflicting forces affecting the USD, potentially keeping it within a range in the short term. This pivotal moment in U.S. monetary policy could reshape currency markets and alter the dynamics of the global economy.
 

The Canadian dollar’s brief summer reprieve appears to have ended. After testing the 1.345 level against the U.S. dollar in August and September, USD/CAD resumed an upward trajectory in early October, driven by fundamentals that suggest further depreciation for the CAD. As the Bank of Canada contends with disinflation and a softening labor market, the case for more aggressive monetary easing is growing. This outlook points toward a potential climb of the USD/CAD exchange rate to around 1.40 in the coming period.

Despite mounting recession risks in the Eurozone, particularly tied to Germany's manufacturing sector, the EUR/USD has climbed to fresh 2024 highs above 1.12. Although the European Central Bank (ECB) has enacted a second rate cut in this cycle, it is expected to proceed cautiously with further easing due to persistent inflation concerns, especially related to wage growth and service prices. This cautious stance likely means that the ECB will not accelerate policy easing before the year ends. EUR performance appears to be driven as much by interest rate spreads as by the regional economic outlook. With the ECB likely to be less aggressive than the Federal Reserve in Q4, the euro may show resilience in the near term, even as recession fears linger. Since hitting lows in early April, the EUR has gained over 5% against the USD. A strong correlation with short-term U.S. Treasury and German Bund spreads highlights the contrast between the Fed’s active policy shifts and the ECB’s gradualism, supporting EUR stability despite immediate recession concerns.

The UK’s macroeconomic performance in 2024 has generally exceeded expectations. After achieving above-trend GDP growth in the first two quarters (0.7% and 0.6%, respectively), economic activity is projected to ease toward trend levels of around 0.3% per quarter in the latter half of the year. The Bank of England (BoE) implemented its first rate cut since March 2020 in August, with Governor Bailey casting the deciding vote in a narrow 5:4 split. Moving forward, the BoE is anticipated to maintain a gradual approach to monetary easing due to ongoing inflation concerns, particularly linked to service price rigidity and elevated wage levels. With inflation forecasted to reach 2.5% by year-end, the expected rate cut in November may be followed by a pause in December, barring any significant shifts in inflation or macroeconomic data. Despite potential headwinds, real money positions in GBP continue to stand above the one-year moving average, showcasing resilience.