CAD: Much speaks in favour of sharper interest rate cuts – Commerzbank

With the USD weakening on concerns about the US economy, USD/CAD has naturally trended lower again. However, this cannot hide the fact that the CAD remains under pressure against the other G10 currencies. Given the weaker real economy and the continued progress in disinflation, the Bank of Canada is likely to accelerate the easing tempo in the near future, meaning that the period of CAD weakness is likely to continue for some time, Commerzbank’s FX Analyst Michael Pfister notes.

Good reasons to trade the CAD weaker

“With the USD weakening on US economic concerns, USD/CAD is now trading well below its high for the year. And in the coming weeks there are good reasons for further USD weakness, given signs of a slowdown in the US real economy and the fact that the Fed is now likely to cut interest rates by much more than previously expected. Nevertheless, we expect USD/CAD to trade sideways in the coming months, with a similarly weak CAD.”

“The all-clear can now be given on inflation. After the last base effect fell out of the calculation in August, the annual rate is now even just below the middle of the target range of 1-3%. Canadian real economy has been weakening for some time as a result of persistently high interest rates. For example, the Canadian labour market is now weakening markedly, while at the same time growth appears to be moving further away from its pre-pandemic trend.”

“This is unlikely to change by the end of our forecast horizon. While we see potential for lower USD/CAD levels early next year, this recovery is likely to be very weak. And if the BoC stops cutting rates in the second half of the year, and at the same time economic growth in Canada picks up, then we are likely to see a similar situation in the US. In short, the outlook for the CAD remains poor for the time being.”

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