Many speak in favor of more drastic interest rate cuts – Commerzbank

With the USD weakening due to concerns about the US economy, USD/CAD has naturally moved 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 continued progress in disinflation, the Bank of Canada is likely to accelerate the pace of easing in the near future, meaning the period of CAD weakness is likely to continue for some time, notes Commerzbank FX analyst, Michael Pfister.

Good reasons to trade weaker CAD

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

“Now the clarity can be given on inflation. After the last core effect fell out of the equation in August, the annual rate is now 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, Canada’s labor market is now weakening significantly, while at the same time growth appears to be moving further away from the pre-pandemic trend.”

“This is unlikely to change until 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 CAD remains weak for now.”