07:14 AM EDT, 07/24/2024 (MT Newswires) -- At 9:45 a.m. ET Wednesday, there is a good chance that the Bank of Canada (BoC) will become the second G10 central bank after the Swiss central bank (SNB) to cut interest rates for the second time in the current cycle, pointed out Commerzbank.

The seasonally adjusted monthly rates of change, which have since been in line with the inflation target, and the continued weakness of the Canadian real economy support this view, wrote the bank in a note to clients. Accordingly, financial markets have almost fully priced in the rate cut, and the Bloomberg consensus is clearly leaning towards another rate cut.

Despite this accelerating turnaround in interest rates, the Canadian dollar (CAD or loonie) has performed reasonably well in recent weeks, stated Commerzbank.

At first glance, this may seem surprising, added the bank. However, Canadian inflation expectations have fallen sharply on the back of the latest figures, allowing the Canadian real interest rate to keep pace with its United States counterpart. This is a factor that is currently supporting the CAD.

However, inflation expectations are unlikely to fall much further, noted the bank. Expectations are already lower than in the US or the eurozone. If the BoC continues to cut rates, real interest rates are likely to fall at some point.

As a consequence, it's particularly important on Wednesday to pay attention to the new forecasts and communication. If the forecasts point to further (larger) rate cuts, the CAD is likely to suffer.