With the Bank of Canada set to make another interest rate announcement on Wednesday, one strategist says investors are considering what another cut could mean for the strength of the Canadian dollar.
Thierry Wizman, global FX and rates strategist at Macquarie Group, says a major factor in assessing the state of the loonie is the interest rate cuts of other central banks.
“One thing that attracts investors in the currencies is the rate of interest that is received on that currency,” Wizman told BNN Bloomberg on Tuesday.
“Of course, we like to think that currencies that have higher rates of interest attached to them are more favourable, more attractive to investors or traders, especially with the money markets than currencies that offer lower rates of interest.”
He added that if the optics are that the Bank of Canada is going to be reducing interest rates more than the central banks of other countries, it could cause the loonie to “fall into disfavour.”
Wizman mentioned that he anticipates many of the central banks around the world to reduce interest rates “between now and the end of the year.”
“The (U.S.) Federal Reserve, for example, maybe cutting its own policy rate by December. So, in that respect, we’re not really looking for a short-term disadvantage to the Canadian dollar here unless of course, the Bank of Canada sounds so exceedingly dovish in its commentary tomorrow.”
“We do think that to some extent, over the course of the easing cycle, that we’re going to see, not just over the next few months but maybe over the next year and a half, that the Bank of Canada will be easing more than The Federal Reserve, maybe by upwards of 75 basis points more,” Wizman said.
He added that, over time, he expects the yield advantage for the Canadian dollar to “widen.”
“Not necessarily today or tomorrow, the Canadian dollar will depreciate versus the U.S. dollar,” he said.
To watch the rest of Wizman’s interview with BNN Bloomberg, click the video above.
