Synopsis:
RBC Capital Markets provides insights into their decision to maintain their end-Q2 target for USD/CAD at 1.37, emphasizing the potential impact of upcoming Canadian inflation data and GDP figures, as well as the Bank of Canada's (BoC) monetary policy trajectory.
Key Points:
- BoC Rate Cut Expectations: RBC anticipates a potential rate cut by the BoC in June, contingent on CPI-trim and -median measures averaging below 0.3% month-over-month. If these inflation measures do not align with expectations, the rate cut may be postponed until the BoC's July meeting.
- Market Pricing: The market currently anticipates a reduction of 10 basis points by June and 25 basis points by July. A June rate cut is not fully priced in, suggesting potential headwinds for the Canadian dollar.
- Economic Data: Canadian Q1 GDP data is also due on May 31, but it is expected to have a secondary impact compared to inflation data and BoC decisions.
- USD/CAD Outlook: Despite a general expectation of a potential rate cut, RBC notes asymmetric downside risks to USD/CAD, particularly if U.S. economic data underperforms or Canadian data exceeds expectations.
Conclusion:
RBC reaffirms its end-Q2 target for USD/CAD at 1.37, balancing the possible effects of Canadian economic indicators and central bank actions against broader market conditions.