The global economic optimism that had propelled stocks around the world to higher levels at the end of 2023 has resurfaced in February, once again driving global stock markets to reach new highs. Similar to the rally at the end of 2023, this surge is also fueled by the potential of Artificial Intelligence (AI). US equities have been at the forefront, with the S&P 500, the Dow, and the Nasdaq 100 closing at all-time highs yesterday. This renewed optimistic economic outlook has led investors to move away from safe-haven assets like the US dollar, which has underperformed. However, the Canadian dollar has not capitalized on the US dollar’s weakness.
Market analysts have suggested that the lack of reaction from the Canadian dollar may be due to lower-than-expected inflation figures released earlier this month, indicating a significant slowdown in Canada’s inflation. This development could set the Bank of Canada (BoC) on a course to potentially reduce interest rates sooner and more aggressively than the Federal Reserve (Fed). Experts anticipate up to three rate cuts this year from the BoC, with the first possibly occurring as early as April. The possibility of the BoC cutting rates sooner and more aggressively than the Fed could lead to a depreciation of the CAD, as a result of the combined effects of differences in interest rates, the outflow of investments, and the perceptions of a weaker economic outlook for Canada.
The coming week is expected to be busier with respect to the economic calendar for the Canadian dollar, with GDP figures scheduled for release for both Canada and the US, alongside a BoC rate decision on February 29th.
The Canadian dollar is currently trading at 1.3496 CAD against the US Dollar.
