Canada’s economic concerns emerge, and the Canadian dollar’s rally may stagnate!

Canada's economic concerns emerge, and the Canadian dollar's rally may stagnate!

Canada’s economic concerns emerge, and the Canadian dollar’s rally may stagnate!

Huitong Finance APP News – Despite the Canadian dollar’s recent outperformance, a new series of forecasts shows that the Canadian dollar is expected to weaken against the US dollar, the euro(1.0887, 0.0032, 0.29%) and the British pound (1.2772, 0.0069, 0.54%) . steady decline. The loonie, which rebounded strongly in June, could face headwinds as economic concerns emerge, MUFG said in a mid-year currency forecast update.

Derek Halpenny, head of EMEA research at MUFG Global Markets, said the loonie’s recent strength was largely driven by the Bank of Canada’s decision to resume its tightening cycle. However, upcoming data showing a weak labor market and a notable drop in inflation cast doubt on the sustainability of the loonie’s rally.

Halpenny noted that a shift in market expectations for the Bank of Canada’s monetary policy has played an important role in driving the Canadian dollar higher. The 2-year U.S. Treasury spread, which measures the difference in yields between the two countries, has plunged nearly 100 basis points from its peak in March to its trough in June.

While initially USD/CAD(1.3281, 0.0004, 0.03%) did not react to the shift, the Canadian dollar has appreciated significantly since late May, climbing from levels above 1.3600.

The Bank of Canada’s decision to tighten monetary policy was driven by data showing the economy’s resilience.

Research by MUFG suggests the loonie’s performance has also been impacted by the continued rebound in equities. However, fears of a possible correction in the loonie could start to weigh on the loonie.

According to MUFG, the loonie’s historical trend shows that it tends to weaken during U.S. recessions. Given the Canadian economy’s close ties to the US, expectations of a slowdown in Canadian growth could intensify, putting downward pressure on the Canadian dollar. Given the recent sharp decline in USD/CAD, MUFG adjusted its forecast to show a clearer path for USD/CAD to rise.

Analysts at the Canadian bank believe that the Canadian dollar’s current level of strength may have reached its limit, suggesting a possible reversal in the Canadian dollar’s gains, with USD/CAD forecast at 1.31 by the end of the third quarter and 1.32 in the fourth quarter of 2024 1.35 in the first quarter of the year.

 

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