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Canadian fiscal policy is currently focused on addressing the housing crisis and supporting economic growth through investments in clean energy and innovation. The government’s 2024 Budget outlines a plan to build more affordable housing, make life more affordable for Canadians, and grow the economy in a way that works for everyone.
Over the past five months, the government has implemented a number of fiscal measures aimed at stimulating the economy and addressing social challenges. These measures include:
The Affordable Housing and Grocery Act aims to reduce the cost of new home construction and enhance the competitiveness of the grocery sector.
The Canada Dental Care Program provides dental coverage to Canadians who do not have insurance.
Investments in clean energy and innovation, including major business investment tax credits for clean technology and clean electricity.
Over the next five weeks, the government is expected to continue implementing its fiscal plan, focusing on implementing the remaining major economic investment tax credits and advancing the housing strategy.
The impact of fiscal policy on economic growth, economic indicators, monetary policy, and financial markets is significant.
The government’s fiscal plan is expected to support economic growth through investments in infrastructure, clean energy, and innovation. However, the effectiveness of these measures will depend on factors such as the global economic outlook and the pace of private sector investment.
Fiscal policy can influence economic indicators such as employment, inflation, and trade. For example, if the government’s housing strategy is successful in increasing housing supply, it will help reduce rental inflation.
Economic Situation
Canada’s economic situation is characterized by slowing growth, falling inflation, and a tight labor market. The Canadian economy has been slowing due to the Bank of Canada’s interest rate hikes, but has not yet fallen into recession.
Economic Growth
Canada’s economic growth has slowed in recent months, but it remains positive. In the first quarter of 2024, Canada’s economy grew by 0.4%, up from a flat growth in the previous quarter. However, this growth was lower than the market’s expectations of 2.2%.
Private sector forecasters expect GDP growth to remain moderate in the coming months, with Trading Economics predicting a 0.4% increase in the second quarter of 2024. For foreign exchange traders, this suggests that the Canadian dollar is unlikely to receive significant support from strong economic growth data in the near term.
Employment
Canada’s labor market remains tight, with low unemployment and solid wage growth. In April 2024, Canada added 90,400 jobs, the most in 15 months, and the unemployment rate remained stable at 6.1%. Average hourly earnings rose 4.7% year-on-year in April.
While the labor market remains strong, there are signs that it is beginning to cool. Job openings have fallen in recent months, and the unemployment rate is expected to rise slightly in the coming quarters. For foreign exchange traders, this means that the Canadian dollar may face some downward pressure due to the weak labor market.
Price volatility
Inflation in Canada has eased in recent months, but it remains above the Bank of Canada’s 2% target. In April 2024, Canada’s annual inflation rate fell to 2.7% from 2.9% the previous month.
Private sector forecasters expect inflation to continue to decline in the coming months, with Trading Economics predicting that inflation will reach 2.5% in the second quarter of 2024. For foreign exchange traders, this suggests that the Canadian dollar is unlikely to receive significant support from high levels of inflation in the short term.
Trade
Canada’s trade account has been volatile in recent months, affected by commodity prices and global demand fluctuations. In March 2024, Canada’s trade account was in deficit of CAD 2.3 billion, compared to a surplus of CAD 0.5 billion in February.
The outlook for Canada’s trade balance is uncertain, with global economic conditions and commodity prices expected to remain volatile. For forex traders, this means that the Canadian dollar could be vulnerable to sentiment swings related to the global trade situation.
Monetary Policy
The Bank of Canada (BoC) began a rate-cutting cycle in June 2024, cutting its benchmark rate by 25 basis points to 4.75%. The BoC’s rate cuts were widely expected, reflecting Canada’s ongoing deflation and slowing economic growth. The central bank indicated that further rate cuts would be in the works if inflation continues to slow as expected.
The BoC’s monetary policy has impacted and may continue to impact economic growth, economic indicators, and financial markets.
BoC rate hikes have led to slower economic growth. However, the recent rate cuts suggest that the BoC is now prioritizing supporting economic activity.
The Bank of Canada’s policies also affect economic indicators such as inflation and employment. If the recent rate cuts stimulate economic activity, it may lead to higher inflation and a tighter labor market.
The Bank of Canada’s monetary policy has a significant impact on financial markets, especially the Canadian dollar exchange rate. The recent rate cuts have led to a weaker Canadian dollar, and further rate cuts may lead to a further weakening of the Canadian dollar.
Geopolitical situation in many places, market-moving events, and market themes may affect the Canadian dollar.
Bank of Canada starts a rate cut cycle
The Bank of Canada started a rate cut cycle, cutting its benchmark interest rate by 25 basis points to 4.75%.
Market impact: The market generally expects the Bank of Canada to expect, but the Canadian dollar is still suppressed due to the widening interest rate gap between the United States and Canada.
Conclusion
The Canadian dollar may face downward pressure from the widening interest rate gap between the United States and Canada over the next five weeks. The Bank of Canada has indicated that further rate cuts may be made if inflation continues to fall, which means that this interest rate gap may widen further.
The Canadian real estate market also poses risks to the Canadian dollar. Although the government is taking steps to address the housing crisis, high levels of household debt and a possible correction in the real estate market will weigh on the Canadian dollar.
For Canadian dollar forex traders, it is important to keep a close eye on the Bank of Canada’s monetary policy decisions, US economic data, and developments in the Canadian real estate market. The prospect of further rate cuts by the Bank of Canada and continued strength in the US dollar suggest that the weakness in the Canadian dollar may continue in the short term.
