Analysts at UBS highlighted the possibility that the Bank of Canada (BoC) will implement rate cuts ahead of the US Federal Reserve amid fears of a slowdown in economic growth.
As a result, the Canadian dollar (CAD) is expected to face only moderate inflationary pressure from the weaker currency. UBS predicts the Bank of Canada’s first rate cut could come in the summer, likely by July, which could provide short-term support for the Canadian dollar.
Canada’s economy, closely linked to the United States, is experiencing divergence as manufacturing sectors weaken globally, leading to reduced cross-border economic effects.
Canada’s limited financial support and consumer vulnerability to high interest rates contributed to a sharper economic contraction than its U.S. counterpart. This sets the stage for a Bank of Canada rate cut, which could potentially precede Fed easing.
UBS suggests that while the Canadian dollar could see some benefit from the Bank of Canada’s decision to hold rates at its policy meeting next week, the impact of US factors on foreign exchange rates will likely limit the Bank of Canada’s influence.
The firm expects the Canadian dollar to rise later this year as the US dollar weakens and the Fed eases policy, supported by a change in the relative rate outlook and improved risk sentiment.
On the investment side, UBS notes that while the Bank of Canada’s preservation could initially benefit the Canadian dollar, subsequent interest rate differentials could be negative.
However, once broader US dollar weakness emerges, CAD is expected to benefit. The resistance level for the pair remains at 1.3850, support is observed at 1.34 and 1.32. UBS prefers call-selling strategies that break through resistance levels.
The analysis also identifies risk factors that could lead to a USD/CAD rally, including a hard landing in the US, Canada or globally, a significant drop in energy prices, or a more pronounced easing cycle from the Bank of Canada.
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