CAD: Much talk in favor of steeper interest rate cuts – Commerzbank

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

Good reasons to trade a weaker CAD

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

“Inflation can now be given the all clear. After the last base effect came out of the calculation in August, the annual rate is now even just below the middle of the 1-3% target range. The Canadian real economy has “Been weakening for some time as a result of persistently high interest rates. For example, the Canadian labor market is now noticeably weakening, while at the same time growth appears to move 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 recovers, then it is likely that we will see a similar situation in the US. In summary, the outlook for the CAD remains poor for the moment.”