06:08 AM EDT, 07/25/2024 (MT Newswires) -- The Canadian dollar has weakened by 0.9% against the US dollar (USD) this month, noted Mitsubishi UFG.

That has helped lift USD/CAD closer to the year-to-date high of 1.38 from April 16th, wrote the bank in a note to clients. The Canadian dollar was undermined by the Bank of Canada's decision to deliver back-to-back rate cuts on Wednesday when the BoC lowered its policy rate by a further 25 basis points to 4.50%.

While the rate cut was almost fully priced in ahead of the meeting, the accompanying policy guidance also left the door open to further rate cuts weighing on the Canadian dollar, stated MUFG. The BoC indicated it is now more focused on downside risks with more excess supply in the economy.

The case for lower rates was supported by the downgrade to the BoC's core inflation forecasts which were lowered by 0.1 point for 2025 and 2026. The BoC looked through the recent stronger inflation prints and continued to describe broad inflationary pressures as easing.

More specifically the BoC noted that its "preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm."

The BoC expects broad price pressures to continue to ease and inflation to move closer to its 2% target. In these circumstances, the bank expects the BoC to keep lowering its policy rate closer to its estimate of the neutral range between 2.25% and 3.25% in the year ahead.

The BoC doesn't appear concerned yet about continuing to lower rates ahead of the United States Federal Reserve which is placing upward pressure on USD/CAD, pointed out MUFG. However, room for policy divergence to widen further between the BoC and Fed in the near term is becoming more limited.

The bank is becoming more confident that the Fed will soon join the BoC in cutting rates at the September FOMC meeting. Former New York Fed President William Dudley attracted some market attention on Wednesday when he called on the Fed to begin cutting rates as soon as this month in response to the rising unemployment rate and recent softer inflation prints although he doesn't think they will act so soon.