After the recent interest rate decision by the U.S. Federal Reserve, economists at TD Bank are adjusting their predictions, foreseeing just one interest rate cut this year in the U.S. They suggest that this shift could have implications for the Canadian dollar, often referred to as the loonie.
In their report, TD economists Beata Caranci and James Orlando analyzed the trajectory of interest rates and their effects on currencies. The Fed decided to maintain its key rate at a two-decade high of around 5.3%, citing persistent high inflation.
Due to the recent inflation uptick not meeting the Fed’s threshold for confidence in returning inflation to two percent promptly, TD Bank now forecasts only one rate cut this year in the U.S.
Conversely, the economists anticipate the Bank of Canada to lower interest rates in the summer. They argue that as borrowing costs decline in other countries relative to the U.S., the U.S. dollar will remain dominant unless significant changes occur in economic dynamics or geopolitics.
However, the report highlights that increased geopolitical risks could bolster the U.S. dollar's strength, placing the Canadian dollar in a vulnerable position.
The Canadian economy has been under pressure due to higher interest rates compared to peer economies, leading to negative gross domestic product per capita figures over the past year.
Despite a rise in population, the Canadian economy would likely have experienced a recession without it, according to the economists.
Looking ahead, they expect first-quarter gross domestic product figures to show improvement due to milder winter weather. Nevertheless, they note cracks in job growth, with the number of unemployed workers rising significantly over the past year.
Considering the softening economic environment, TD economists anticipate a summer interest rate cut from the Bank of Canada to avoid undermining sentiment on the loonie.
Overall, the report suggests that the Canadian dollar could face further depreciation, potentially testing or dropping below 70 cents U.S., especially if geopolitical risks drive up oil prices, a key factor for Canada's economy.
