Canadian dollar weakens vs. USD as spreads, Bank of Canada bets prove a headwind

Investing.com - The Canadian dollar lost further ground against its US counterpart today, and with the greenback gaining roughly a third of a percent vs. the loonie for the week. 

Analysts at Scotiabank (TSX:BNS) note that market drivers of loonie weakness this week include a stronger correlation with spreads at a time when spreads are working against the loonie. 

“Spreads have moved against the CAD in the past week or so, reflecting somewhat lower Canadian yields following the softer than expected Canadian CPI data, and the grind higher in US rates.” 

Canadian CPI data this week came in cooler than expected, bringing forth bets of a Bank of Canada rate cut as early as April. Meanwhile, hawkish rhetoric and Fed minutes have set expectations for a rate cut from the U.S. Federal Reserve in June. 

Scotiabank analysts also note that the past week has seen “some softening in the CAD’s linkage with stocks”, with a market rally in equities failing to lend significant support to the loonie. 

Looking ahead for the Canadian dollar, Wells Fargo (NYSE:WFC) analysts expect the loonie’s muted performance to be “a trend that could continue 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 Loonie could be an underwhelming performer over the medium term.” 

Wells Fargo expects a cumulative 100 bps of rate cuts from the Bank of Canada in 2024, vs. a  cumulative 125 bps of rate cuts from the Federal Reserve over the same period. They see the USDCAD trading at 1.3300 by the end of 2024, with the Canadian currency set to see only modest gains.

Next week for the pair, all eyes will be on the Canadian December and Q4 GDP.  U.S.  data meanwhile will include Consumer Confidence, Q4 GDP revisions, and the Jan PCE data. 

For next week, Scotiabank's week ahead model "suggests spot could trade between 1.3610/1.3390, with 75% confidence”.