A divergence between the Canadian and American economies is increasingly evident.
The Bank of Canada’s interest rate decision on Wednesday put a June rate cut on the agenda, while the US CPI report released the same day could mean the Federal Reserve will only cut no rates at all this year.
Canadian inflation is rapidly approaching the target, while American inflation is stable. Economic performance has also diverged, with the U.S. economy beating expectations for a slowdown while Canada is slipping with slow growth.
This may have something to do with it:
- Estimated U.S. deficit to GDP this year: 6.8%
- Canada has the highest deficit relative to GDP this year: 1.8%
- Core CPI in the United States: +3.8% year-on-year
- Core CPI in Canada: +2.1% year-on-year
The foreign exchange market is paying increasing attention to this, although Canada appears to be avoiding the risk of a further decline in real estate prices, in part because of rising immigration.
Technically, USD/CAD’s two-day jump is a breakout after weeks of consolidation around 1.3550. I expect continued gains up to 1.3800, especially if risk aversion in broader markets remains elevated and oil price gains stall.
USCAD daily
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