According to analysts from Deutsche Bank, the Loonie (CAD) is likely to trade lower against the US dollar amid some negative factors persisting in the Canadian economy.
Key Quotes:
“CAD has been bounced between an extremely weak Q4 and poor leading indicators on one hand, and oil-price strength on the other, which we think is fundamentally sustainable. The corresponding dovish shift now has the market pricing a policy rate cut (-3 bps for July) in light of the widening output gap in December (-0.4%). The risk is that the transitory weakness, now expected the last for all of H1, develops into a longer lasting downturn.”
“The Bank of Canada will remain in a holding pattern for the near term which appears sensible in the context of the Fed pause and the fact that the current gap in US-Canada policy rates is equal to that observed at the peak of the last two policy cycles.”
“Tentative signs of a rebound in manufacturing sales (Jan) and wage growth (Feb), together with further oil-price upside should reduce the probability of more extreme scenarios (e.g., USDCAD at 1.40). However we keep a bullish bias (targeting USDCAD 1.36 by year-end) in light of longer-lived negative factors persisting, as the housing market remains a drag on construction, and household consumption growth is limited by debt service ratios reaching a record high.”
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