FX Forecast for March 2024: Rate cuts may be further delayed as inflation persists

USDCAD Q2 2024:

- Median: 1.34
- High: 1.38
- Low: 1.29
- Forward: 1.36

The US dollar maintained its strength in February and early March, bolstered by robust economic indicators such as the nonfarm payrolls report, reaffirming the Federal Reserve's decision to keep interest rates elevated. US inflation stood at 3.2%, exceeding expectations, while Canada reported a lower-than-expected 2.8%.

Federal Reserve officials continue to resist the notion of an imminent rate cut, with intentions to implement three gradual reductions starting in the latter half of the year, each by 0.25%, aiming for a year-end rate of 4.75%. However, there is growing speculation that only two cuts may materialize, with the third postponed until 2025.

The European Central Bank remained committed to maintaining high rates but faced weaker economic data compared to the US, while Japan's decision to raise rates by 0.25% failed to strengthen the yen. The overall resilience of the US economy has bolstered the strength of the US dollar.

Although critics previously argued that the greenback was at a decade-high, they are now conceding given the strong macroeconomic fundamentals of the country. It is anticipated that the USD will maintain its strength throughout 2024.

Canada, on the other hand, is faring relatively well, supported by higher commodity prices and its close proximity to the US market, benefiting from economic spillover effects. The Bank of Canada opted to keep its policy rate unchanged in March, supporting the Canadian dollar (CAD). However, the unexpectedly low inflation figures and ongoing housing and cost-of-living challenges in Canada could prompt the BoC to implement rate cuts sooner than expected.

One potential concern is that lower rates might reignite oil prices, but the BoC governor emphasized that housing prices are not a priority within their mandates and that rates will be adjusted as needed. It is anticipated that Canada may witness three rate cuts in 2024.

With gold reaching all-time highs and oil hovering around $82, the Canadian dollar could continue to find support against major currencies. For instance, the Australian dollar, heavily influenced by China's economy, is trading at 0.89 CAD. Overall, the US dollar appears to be the primary beneficiary for the foreseeable future.