The Canadian dollar continued to weaken against the US dollar today, with the greenback gaining approximately a third of a percent against the loonie for the week.
According to analysts at Scotiabank (TSX:BNS), key factors contributing to the loonie’s weakness this week include a heightened correlation with spreads, which are currently moving in a direction unfavorable to the Canadian dollar.
“Spreads have moved unfavorably against the CAD in the past week or so, reflecting slightly lower Canadian yields following the softer-than-expected Canadian CPI data, coupled with the upward trend in US rates.”
The release of cooler-than-expected Canadian CPI data this week has sparked speculation of a Bank of Canada rate cut as early as April. Meanwhile, hawkish rhetoric and the Federal Reserve’s minutes have raised expectations of a rate hike from the US Federal Reserve in June.
Scotiabank analysts also observe that there has been “some softening in the CAD’s linkage with stocks” over the past week, as a market rally in equities has failed to significantly bolster the loonie.
Looking ahead for the Canadian dollar, analysts at Wells Fargo (NYSE:WFC) anticipate the loonie’s muted performance to persist for the time being. They note that “Given a broadly similar growth and monetary policy outlook for Canada and the United States, it is also possible that the Loonie could be an underwhelming performer over the medium term.”
Wells Fargo anticipates a cumulative 100 basis points (bps) of rate cuts from the Bank of Canada in 2024, compared to a cumulative 125 bps of rate cuts from the Federal Reserve over the same period. They project the USDCAD to trade at 1.3300 by the end of 2024, with the Canadian currency expected to see only modest gains.
In the upcoming week, significant attention will be on the release of Canadian December and Q4 GDP data. Additionally, U.S. data releases will include Consumer Confidence, Q4 GDP revisions, and January PCE data.
Scotiabank’s week-ahead model indicates that the spot could trade within the range of 1.3610 to 1.3390, with 75% confidence, for the next week.