Bank of Canada readies for a rate cut. Why the loonie is bracing for impact

globalnews.ca:

With the Bank of Canada gearing up for its final interest rate decision of 2024, experts warn the flagging Canadian dollar could well have further to fall if the central bank delivers the sizeable cut that markets expect.

The Bank of Canada is widely expected to lower its benchmark interest rate, currently sitting at 3.75 per cent, in a fifth consecutive decision on Wednesday.

But how steeply the central bank cuts is still up for debate, with markets and many economists now arguing for a larger, 50-basis-point cut, matching the drop seen in October.

Money markets raised odds of an oversized step to 80 per cent after Friday’s November jobs report showed a larger-than-expected jump in the unemployment rate to 6.8 per cent last month.

The weak employment figures were enough for BMO to shift its own call for Wednesday’s rate decision, with economists at the bank now expecting a half-point cut rather than the typical 25 basis points. TD Bank is the lone big Canadian bank calling for a quarter-point cut this week.

But Friday’s jobs report also had a dampening effect on Canada’s dollar.

The Canadian dollar lost roughly half a cent compared to the American greenback on Friday, continuing what has been a dismal few months for the loonie.

As of late Monday, the loonie stood at around 70.5 cents to the U.S. dollar, around four cents lower than where it stood in late September. The Canadian currency is floating just above 4.5-year lows compared to its U.S. counterpart.

Among the factors experts have offered to explain the loonie’s decline are the re-election of Donald Trump and the president-elect’s protectionist trade policies.

But Nathan Janzen, assistant chief economist at RBC, points to a divergence in the policy rates between