Above: File image of BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing.

The Canadian Dollar is a laggard on global foreign exchange markets after the head of Canada's central bank openly discussed interest rate cuts for the first time.

Bank of Canada Governor Tiff Macklem said in an interview on Monday that he expects rates to be cut next year.

Markets are already priced for such an eventuality, but these bets were reinforced by Macklem's acknowledgement, which was reflected in a weaker CAD.

"The Canadian dollar is lagging other pro-cyclical currencies at the start of this week after Bank of Canada Governor Tiff Macklem said in a TV interview yesterday that he expects rates to be cut next year. This is a surprise statement by Macklem," says Francesco Pesole, FX Strategist at ING.

Pesole notes that only two weeks ago Macklem reiterated the hawkish bias in the BoC policy statement.

This suggests the Bank of Canada's policy pivot has been realised.

The Pound to Canadian Dollar rose to 1.67 in the hours following the developments, but it will take a great deal more work to invalidate the short-term downtrend, which has been running for three weeks now.

The Dollar to Canadian Dollar exchange rate (USD/CAD) was meanwhile unable to make any meaningful gains and arrest its short-term downtrend, quoting at 1.3380 at the time of writing.

The Bank of Canada's pivot might not surprise some as the Federal Reserve announced a pivot at last week's policy update, confirming Canadian policy will move in lockstep with the U.S. over the coming months.

This explains why the Canadian Dollar's losses are greater against the European currencies than against the Dollar.

Pesole says offering a timeline for rate cuts appears inconsistent with the BoC's claim that it "remains prepared to raise the policy rate further if needed" and likely validates the market’s pricing for 100bp of easing next year.

"Despite our view of a dollar decline and outperformance of pro-cyclical currencies next year, we expect the Canadian dollar to underperform other commodity currencies as the BoC cuts rates aggressively (we estimate 150bp in 2024) on a grim economic outlook and as the loonie suffers from its correlation with US economic data," says Pesole.