Most recently, USD/CAD has principally trended upwards. But economists at Commerzbank see moderate upside potential for the Loonie.
US debt ceiling row versus rate hike expectations
“CAD is unable to keep up; and clearly the uncertain outcome of the row about the debt ceiling is having a bigger effect than the rising rate expectations for Canada (stronger compared with the US).”
“From our point of view this entails moderate potential for further CAD recovery against USD once it becomes clear that an agreement can be reached at the last minute.”
“It cannot be excluded that the market will also see a higher likelihood of a Fed rate hike after the US debt conflict is resolved, but CAD should at least be well supported against a Dollar which remains in good demand.”
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Writing in theWall Street Journal, Commerzbank analysts offered a medium-term outlook for the USD/CAD currency pair, suggesting a moderate potential for further recovery in the Canadian Dollar.
The US Dollar has still been trading at high levels, which has limited the potential for large price swings. As the Canadian Dollar is seen as a major reserve currency and an important component of global commodities trading, the pair has been trading within a tight range for some time. However, the analysts feel that the Canadian Dollar could continue to make modest gains versus the USD in the coming weeks.
The main drivers behind the potential for further Loonie recovery are the resilient economic outlook and the improving indicators that point to the Canadian Dollar’s increased demand. In particular, the Canadian labour market, which has been below the US level for some time, has recently seen an improvement, with the unemployment rate recently declining to its lowest level since 2019.
Furthermore, the analysts expect the Bank of Canada to become a bit more hawkish in its monetary policy, given the recent pick-up in inflation, as well as the positive impact of the recent USMCA trade agreement.
On the other hand, the US Dollar could remain weak due to the political uncertainty in the US caused by the ongoing dispute between President Trump and Congress over the border wall. In addition, the expected increase in US interest rates may also curb further gains in the US Dollar.
Overall, Commerzbank analysts believe that the USD/CAD currency pair may experience moderate gains in the near-term. However, as the pair is still relatively tightly ranged, short-term opportunities may be limited and investors should be prepared to adopt a more cautious approach to trading.