Traders gird for weaker Canadian dollar as first rate cut eyed

Traders are bracing for weakness in the Canadian dollar amid wagers that local policymakers will likely reduce interest rates before their peers at the U.S. Federal Reserve.

That rate differential — which some on Wall Street expect to widen when the Bank of Canada meets on Wednesday — is already fueling one of the worst performances among Group-of-10 currencies this quarter. The loonie has been the second-weakest performer in the Group of 10 since the end of March, trailing only the Japanese yen.

“The BOC will deliver a cut which will weigh on the Canadian dollar,” said Elias Haddad, a senior strategist at Brown Brothers Harriman. He — like many on Wall Street — expects the Canadian central bank to reduce rates soon, while data in the U.S. may force Fed officials to keep rates higher for longer.

For many currency traders, that means the loonie is likely to keep slipping against the greenback, regardless of whether a Canadian rate cut comes in June or July. The market is pricing in around an 80 per cent probability of a cut on Wednesday, a jump from about 60 per cent odds implied before last week’s weaker-than-expected reading of Canada’s gross domestic product.