Canadian Dollar Finds Footing as Dovish BoC Signals Fuel Rate Cut Expectations

The Canadian dollar managed to steady itself against its U.S. counterpart, finding a pause after a recent spell of losses. This stabilization comes as fresh data from the Bank of Canada (BoC) — notably its Business Outlook Survey and the Canadian Survey of Consumer Expectations — painted a picture of a softening economy, reinforcing market expectations for impending interest rate cuts.

Economists and market analysts are keenly observing these indicators, with the surveys bolstering the consensus that the BoC could begin easing monetary policy as early as June.

The business outlook, in particular, revealed a significant shift: firms are now anticipating a noticeable deceleration in sales growth over the coming year. This marks a stark contrast to previous periods of robust demand and suggests a broader cooling in economic activity.

Further underscoring the dovish sentiment, hiring intentions among businesses have notably eased.

While some sectors still face labor shortages, the overall trend points towards a less aggressive approach to recruitment. This moderation in the labor market is a key factor the BoC considers when assessing inflationary pressures and economic capacity.

On the inflation front, the surveys presented a mixed but generally encouraging picture.

Businesses continue to expect inflation to remain elevated for the short term, but the intensity of these expectations has somewhat lessened. Consumers, on the other hand, are starting to perceive an easing of inflation over the next year, coupled with a decrease in job insecurity. However, the anticipated pace of price increases remains a concern for many households.

These comprehensive insights from the BoC's surveys have solidified the market's conviction that rate cuts are on the horizon.

Futures markets are now pricing in a roughly 60% chance of a rate cut in June, signaling a strong belief among investors that the central bank will move to stimulate the economy. The Canadian dollar's performance, therefore, remains intricately linked to these evolving expectations and the BoC's future policy decisions.

Against this backdrop, the Canadian dollar was trading nearly unchanged at 1.3595 to the U.S.

dollar, or 73.56 U.S. cents. This followed a rally in early March that saw the currency reach an eight-month high. Meanwhile, Canadian government bond yields saw a modest decline across the curve, with the benchmark 10-year yield slipping by 1.6 basis points to 3.475%. The price of oil, a key Canadian export, also played a role, with U.S.

crude oil futures edging up 0.1% to $85.73 a barrel, providing some underlying support for the commodity-linked loonie.