The Canadian dollar starts the new week at a crossroads. Traders are trying to figure out how quickly the Federal Reserve will lower interest rates compared to the Bank of Canada, which has already started to ease.
The loonie’s direction will be affected by policy differences as much as by commodity prices. This is because oil prices are stuck near recent lows and domestic inflation is getting closer to the target.
On September 17, the Bank of Canada lowered its overnight rate by a quarter point to 2.50%. It also announced that it would make its next decision and new projections on October 29.
The statement called the move “risk management,” pointing out that growth was slowing and prices were less likely to rise.
The bank said it “lowered its target for the overnight rate by 25 basis points to 2.5%” and will be careful from here on out.
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The Fed’s most recent Summary of Economic Projections shows that the policy path will get lower over time in the United States.
The middle dot suggests that the federal funds rate will be about 3.6% at the end of 2025 and 3.4% in 2026, with a longer-term estimate of 3.0%.
That path suggests that there is room for more easing, but not a rush to the bottom, which keeps the dollar strong unless U.S. data gets much worse.
The way inflation is changing in Canada is helping Ottawa out. In August, the headline CPI went up 1.9% from the previous year, up from 1.7% in July. Prices went up 2.4%, not including gas.
The Bank of Canada said in its September deliberations summary that core inflation had slowed down from its previous high, with shorter-term measures falling even as some preferred gauges stayed close to 3 percent.
The readings together suggest a cautiously easier stance without suggesting a loss of price stability.
On Friday, the front-month WTI price settled at about $60.88 a barrel, and the Brent price settled at about $64.53.
After a week of declines due to worries about too much supply, both benchmarks are now well below midsummer levels.
A softer crude market usually makes Canada’s terms of trade worse, which makes the currency less appealing when yield support is fading.
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The central bank pointed out that the job market is getting weaker and trade is getting harder, and it is keeping an eye on how household spending holds up as mortgage renewals hit.
The Financial Stability Report from the Bank of Canada says that about 60% of all outstanding mortgages will roll over in 2025 and 2026. Most of those borrowers will have to pay more than they did during the pandemic lending boom.
A long lasting rise in crude oil prices would boost Canada’s export earnings and usually help the currency, but that hasn’t always been the case.
It’s a good idea to hedge CAD exposure around policy dates. Corporate treasurers with cross border payables should pay as much attention to the Fed’s dots and the Bank of Canada’s advice as they do to the oil screen.
The loonie’s path looks choppy rather than clear until there is a big change in either policy or crude.
