The Canadian dollar (CAD) is currently experiencing a decline. It hasn’t been able to keep pace with the upward trends observed in other major G10 currencies, particularly against the US dollar (USD).
This lack of performance may be attributed to Canada’s distinct risk profile and an increasing disparity between domestic monetary policy and global market movements, according to analysts.
Differences in central bank policies weigh on the loonie
The Global FX Strategy Team at Scotiabank notes that the Canadian dollar’s struggle to capitalize on broader G10 benefits stems from both its unique risk profile and evolving expectations around central bank policies. Specifically, the widening gap between the Bank of Canada (BoC) and the Federal Reserve (Fed) in their monetary policy approaches presents challenges for the Canadian currency.
The immediate outlook for the Canadian dollar remains focused on the relative stance of central bank policies, especially as the Fed’s outlook solidifies alongside widening interest rate spreads indicating softer central bank policies.
Technical indicators show USD/CAD appreciation is stalling
In a separate technical assessment, Scotiabank analysts point out that while the US dollar has gained strength against the Canadian dollar, the upward movement of the CAD is hitting some resistance. Fundamental assessments suggest that the Canadian dollar’s intrinsic value may be stronger than what the current market price indicates.
The fair value estimate for USD/CAD currently sits at 1.3672, indicating that CAD has stronger fundamental backing.
Analysts expect range-bound trading with potential for Canadian dollar rebound
Overall, the bank’s perspective leans toward a neutral to bearish outlook for the Canadian dollar in the short term, given its tendency to lag during times of heightened market optimism. However, technical signals show that the USD/CAD rally is stalling at significant moving averages. The “fair value” model suggests that the Canadian dollar may be well-positioned for support and possibly a rebound if upcoming Canadian economic data exceeds expectations.
