Loonie 'caught in the crosshairs' amid shifting Fed rate cut expectations: TD Economics
BNN Bloomberg
Following the latest interest rate decision from the U.S. Federal Reserve, economists at TD Bank are predicting only one interest rate cut this year in the U.S. while adding the rate path could have implications for the loonie.
In a report Thursday, Beata Caranci, the chief economist and senior vice president at TD Economics, and James Orlando, a director and senior economist at TD Economics, examined the trajectory of interest rates and the impacts on currencies. On Wednesday the Fed held its key rate at a two-decade high of around 5.3 per cent while saying inflation has remained stubbornly high.
We have shifted our Federal Reserve call to only one rate cut this year due to the recent back-up of inflation that does not meet the Fed’s ‘confidence’ threshold to return inflation to two per cent in a timely manner,” the report said.
In contrast, the economists expect the Bank of Canada to bring interest rates lower in the summer. As borrowing costs are expected to move lower in other countries relative to the U.S., the economists said the U.S. dollar would have “no challenger” until material changes occur in economic dynamics or geopolitics.
Manufacturing sales fell 2.1 per cent to $69.9 billion in March as sales of petroleum and coal products and motor vehicles fell, Statistics Canada said Wednesday. Olivia Cross, North America economist at Capital Economics, said the result was not as bad as the early estimate that pointed to a drop of 2.8 per cent, but it still means sales fell 0.9 per cent over the first quarter. "The weakness of manufacturing sales in March suggests that the economy lost momentum heading into the second quarter, matching the message from the earlier preliminary estimates for retail sales and GDP," Cross said in a note. Last month, Statistics Canada released a pair of preliminary estimates for real gross domestic product and retail sales for March that both suggested the data points were essentially unchanged for the month. Driving the manufacturing sales numbers for March was an 8.0 per cent drop in sales of petroleum and coal products to $8.0 billion as volumes fell 6.1 per cent. Sales of motor vehicles fell 7.9 per cent to $4.6 billion in March as sales of motor vehicle parts lost 2.8 per cent. Statistics Canada says retoolings at several major auto assembly plants in Ontario continued to impact auto manufacturing and contributed to the lower sales for the month. Meanwhile, sales of machinery rose 2.9 per cent to $4.5 billion in March. The increase came as sales in all seven machinery industry groups climbed higher, led by commercial and service industry machinery which gained 41.6 per cent. Overall manufacturing sales in constant dollars fell 2.0 per cent in March. Total inventories for the month were largely unchanged at $121.0 billion in March, while unfilled orders fell 0.8 per cent to $104.8 billion. This report by The Canadian Press was first published May 15, 2024.