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Retail Rate Forecasts

Canada Gets Closer to Cutting Rates, but the US May Have to Hold Off

May 7, 2024
Jimmy Jean, Vice-President, Chief Economist and Strategist
Lorenzo Tessier-Moreau, Principal Economist • Hendrix Vachon, Principal Economist


  • The US economy is still generating too much inflationary pressure.
  • The Bank of Canada took another step towards its first rate cut.
  • The prospect that monetary policies could diverge sent many currencies lower against the US dollar in April.
  • The jump in bond yields is hampering positive stock market momentum.

Exchange Rate

The Prospect that Monetary Policies Could Diverge Sent Many Currencies Lower Against the US Dollar in April

Currency Shock after US Inflation Reading

As with bond yields, there were a lot of changes in exchange rates in April after US data showed just how sticky inflation is (graph 4). In general, emerging market currencies fell the most. The rise in US bond yields has added another layer of financial stress for many of these countries since they typically borrow in US dollars. Mexico and Brazil were among those that saw their currencies depreciate the most. The fact that both countries’ central banks had already started lowering their key interest rates added to the downward pressure on these currencies. The yen also took a big hit, as the spread between Japanese and US yields remains wide.

The Loonie Didn’t Fall as Much as Some Other Currencies

The Canadian dollar lost just over 1% in April, though at one point during the month it was down more than 2%. Investors still aren’t betting on Canada’s monetary policy diverging significantly from the US’s, but interest rate spreads between Canada and the United States widened nonetheless. The slump in oil prices didn’t have too much of an impact on the Canadian dollar, which also barely budged during the preceding uptick in crude prices.

The Canadian Dollar Could Soon Put the C$1.40/US$ Threshold to the Test

May and June will probably look a lot like April. Changing monetary policy expectations will likely continue to shake up the currency market. Our new forecasts for the Federal Reserve and the Bank of Canada are consistent with interest rate spreads widening in the coming months and the Canadian dollar depreciating further (graph 5). The markets still haven’t fully priced in the two interest rate cuts that we expect in Canada in June and July. The loonie will likely get close to the C$1.40/US$ threshold over the summer. But it could start recovering by the fall, in anticipation of US rate cuts.

Asset Class Returns

The Jump in Bond Yields Is Hampering Positive Stock Market Momentum

Government Bond Yields Are Approaching October Highs

Bond returns were once again hit by rising yields. The resurgence of inflationary pressures in the United States led market participants to sharply revise their forecasts for key rates. This had an impact that could be seen throughout the yield curve. The uptick in yields also sent a wave of uncertainty through the stock markets, which fell sharply in April (graph 6). Investors seem to have been reassured by Fed Chair Jerome Powell’s messaging in early May, which helped stabilize bond yields and sent markets back up a few points. But it’s too early to say whether this trend will last.

Stock Markets Have Temporarily Stopped Rising—and for Good Reason

The recent stock market decline shouldn’t surprise anyone, especially in the United States. The S&P 500 had been on an almost uninterrupted 5-month winning streak fuelled by the tech craze and optimism over economic growth and inflation. The stock market boom pushed share price growth far above that of expected corporate earnings (graph 7). The recent improvement in the economic outlook suggests corporate earnings will continue to rise, but it could also keep interest rates higher for longer. This could make it hard to justify today’s high stock valuations. 

Canadian Equities Benefit from Monetary Policy Divergence and Lower Stock Prices

Although forecasts for US key rates have been revised upward, the economic outlook for Canada is much gloomier. This would justify looser monetary policy and a weaker loonie. Both of these factors could lift Canadian corporate earnings by driving up demand for exports and reducing borrowing costs. Relatively lower interest rates could also push up stock prices. These factors, along with a boost from certain commodity prices, helped limit the recent drop in the S&P/TSX index (graph 8). This means that, despite tougher economic conditions, Canada’s flagship index could very well outperform the S&P 500 in 2024.

The European Central Bank Set the Stage for a Rate Cut in June

Investors everywhere are betting that the European Central Bank (ECB) will start cutting rates in June. Progress on inflation and lagging economic growth have kept the eurozone in disinflationary territory. In April, the ECB gave a strong signal that it could cut rates in June. As for the United Kingdom, the Bank of England (BoE) will most likely wait a little longer, until it sees signs of further progress on inflation. We expect the BoE to start cutting rates at its early August meeting, which would fall between the first cuts made by the Fed and ECB.


Meanwhile, the yen’s depreciation is cranking up the pressure on the Bank of Japan (BoJ) to raise rates. We expect it to announce two interest rate hikes by late summer. The BoJ could also intervene on forex markets to prop up the yen and keep import prices from fuelling inflation. But even though monetary policies in Asia and Europe are diverging from the Fed’s, it wasn’t enough to limit the global stock market decline since the risks related to corporate earnings seem to be bigger.

Big Risks Remain for Stock and Bond Markets

If there’s one thing we should learn from the events of recent weeks, it’s that interest rate forecasts can change fast. In just a few weeks, investors went from expecting three cuts to the fed funds rate in 2024 to only expecting one. Inflation is still very much a risk, as shown by recent US figures. If this risk materializes, forcing the Fed to start raising rates again, it’s quite possible we’d see further sharp downturns on both stock and bond markets. Our baseline scenario still expects some stock market volatility over the short term, followed by a recovery in the second half of the year. We also predict bond yields will start heading back down, boosting returns for this asset class.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.