The Bank of Canada is expected to lower its policy rate to 2.75% at its Wednesday meeting, marking the seventh rate cut since June 2024. This round of interest rate cuts was originally intended to cope with falling inflation and slowing economic growth, but the current trade tensions have become the main driving force for the central bank's policy adjustments.

The Trump administration has imposed a 25% tariff on most goods from Canada and Mexico, but some products enjoy a one month buffer period. Canada has imposed tariffs on $30 billion worth of goods from the United States and plans to expand them to $155 billion on April 2nd. If negotiations fail, the trade conflict will further escalate.

The US has imposed an additional 25% tariff on Canada's steel and aluminum industry, and even briefly threatened to raise it to 50%, further impacting Canada's export industry. The trade conflict is expected to reduce Canada's GDP by 2% -4% and pose a risk of rising inflation.

Although trade tensions have intensified the risk of economic recession, core inflation remains stubborn. The core inflation rate remained at 2.7% in January, higher than the central bank's target level of 2%.

The central bank expects that the increase in import costs caused by trade conflicts will drive inflation further upward, making it face more complex policy choices.

Citigroup economist Veronica Clark said, "If we only rely on recent data, I don't think the central bank will cut interest rates. However, the uncertainty of trade tariffs has reduced the reference value of previous data

The annualized economic growth rate in the fourth quarter of 2024 reached 2.6%, mainly benefiting from household consumption and the recovery of the real estate market. Since June 2024, the central bank has cut interest rates six times in a row, helping interest rate sensitive industries recover.

However, due to the possibility of ongoing trade conflicts, the market generally expects the Bank of Canada to further lower interest rates to 2% within this year.

Recently, the US dollar has repeatedly tested the 1.4500 level against the Canadian dollar, mainly because the expectation of the Bank of Canada's interest rate cut has been fully digested by the market, while the pace of the Federal Reserve's interest rate cut is still uncertain. The widening interest rate differential between the US and Canada has further put pressure on the Canadian dollar.

If the Bank of Canada cuts interest rates by 25 basis points this week and the Federal Reserve does not cut interest rates in the short term, the US Canada interest rate differential will continue to widen, driving the US dollar to rise against the Canadian dollar.

At present, the market expects that the Federal Reserve may cut interest rates in June, while the Bank of Canada may further cut interest rates within the year, which will continue to benefit the US dollar.

Meanwhile, as a major oil producing country, Canada's currency trend is highly correlated with oil prices. However, the recent continuous decline in oil prices has driven down the Canadian dollar.

If oil prices further fall below $65, the Canadian dollar may experience a greater decline.

Editor's viewpoint:

The Canadian dollar is currently facing a bearish trend due to multiple unfavorable factors such as trade uncertainty, central bank interest rate cuts, and weak oil prices.

In the short term, the Bank of Canada's interest rate cut will weaken the attractiveness of the Canadian dollar and push the US dollar further higher against the Canadian dollar.

In the medium term, if Trump's tariff policies continue to escalate, the Canadian economy will face greater impact and the Canadian dollar may further weaken.

In the long run, unless the Federal Reserve starts to significantly reduce interest rates, the US dollar will remain strong against the Canadian dollar.

Key factors that the market needs to pay attention to:

1. Bank of Canada policy statement: If more signals of interest rate cuts are released, the Canadian dollar will be further under pressure.

2. Federal Reserve interest rate decisions and US economic data: If the Federal Reserve delays interest rate cuts, it will further support the US dollar.

3. Oil price trend: If oil prices fall below $65, the Canadian dollar may continue to depreciate.