While the market has already priced in several rate cuts over the next year in addition to the 25bps rate cut last month, a more conservative approach suggests another with another 25 bps before year-end and a pause through 2020. The household sector is in a position to support growth given a low debt-service burden, healthier after inflation wage gains, and a respectable savings rate. A proposed budget deal looks to have added a few decimal places to growth in 2020 versus our prior forecast. Overall an easing monetary policy, a rise in trade tensions and global growth uncertainties point to a weakening greenback into 2020.
The Canadian economy looks to have been fairly solid in Q2, but on a more meaningful four quarter trend, real GDP is running a shade under 1½%, just under its noninflationary potential. Unlike the US, core and headline inflation readings are right on target. With the BoC having hiked more cautiously than the Fed during this cycle, it can wait to see a more meaningful risk to growth before lowering rates. The C$ will therefore get a tailwind as the Fed starts to take rates lower this year. Most look for the loonie to strengthen toward 1.28 into next year.