Image © Bank of Canada
CAD is "broadly unattractive", says ING Bank.
The Canadian Dollar's spell of strength won't persist through the second half of the year, shows a new analysis.
"The loonie does not look attractive in other G10 crosses," says Francesco Pesole, an analyst at ING Bank N.V.
Crosses refer to non-USD exchange rates, and therefore cover pairs such as the Pound-Canadian Dollar and Euro-Canadian Dollar.
When screened over the past month, the CAD is one of the better performing global currencies, benefiting from easing trade tensions with the U.S. and signs that the Bank of Canada has entered an extended pause in activity, lessening the odds of further rate cuts.
"The Canadian dollar has been one of the best performers in the G10 over the past month, helped by some stronger-than-expected inflation and growth data that ultimately led to a Bank of Canada hold on 4 June," explains Pesole.
ING thinks the CAD can maintain outperformance against the U.S. Dollar, "on the back of lacklustre USD demand," but various headwinds will keep it pressured against other peer currencies.
"The new U.S. metal tariff hikes disproportionally hit Canadian exporters, and there are no indications of imminent high-level trade negotiations with the U.S.," says Pesole.
ING says Canada's economic growth profile is "heavily tilted to the downside in Canada, and we believe the Bank of Canada will need to react, possibly by cutting rates as soon as July."
The Bank of Canada maintained interest rates for a second consecutive policy meeting on June 04, indicating interest rates are at an appropriate level that will neither restrict nor stimulate the economy.
Should ING be correct, and the Bank of Canada moves as soon as July, it would surprise a market consensus that sees only 8 basis points of cuts at the meeting, effectively meaning investors score a very low chance of a 25 basis point cut.
By September's meeting 15bps are priced, suggesting 50/50 odds of a move by this point.
Interest rate expectations are important for a currency, and a rise in the odds for another move will mechanically weigh on the Canadian Dollar.
"So we see scope for a dovish shift in the CAD curve that, when adding the risks of exposure to more potential deterioration in U.S. sentiment, makes the loonie one of our least favourite currencies in G10 at the moment," explains Pesole.
(A dovish shift means more rate cuts are 'priced in' by investors than is currently the case).