The USD/CAD is heading towards its lowest weekly close since February, falling below 1.3400. Analysts at MUFG Bank believe that the Canadian Dollar has the potential for short term outperformance. They have expressed caution regarding the prospects for CAD, stating that it will most likely be a laggard compared to most of the G10 currencies over the course of the year. However, with a short term perspective, they see some potential for CAD to perform better.
The resilience of the Canadian economy and the Bank of Canada’s (BoC) slightly more hawkish communication this week has helped maintain the USCA 2-year swap at levels conducive to further declines in USD/CAD. While the analysts do not expect any additional rate hikes, they noted that the relatively strong economic performance and the BoC’s messaging have supported a more positive outlook for the Canadian currency.
A short-term regression model incorporating interest rates and crude oil prices also indicates that there is potential for USD/CAD to drop a couple of big figures from its current level. Furthermore, an analysis of the International Monetary Market reveals that CAD shorts are most stretched based on z-score, which could prompt some CAD buying as well.
Despite the potential for short-term outperformance, the Canadian Dollar may face headwinds over the longer term. Several factors could weigh on the currency, including slowing global economic growth, geopolitical risks, and potential shifts in monetary policy. The Bank of Canada has indicated that it will remain data-dependent in its policy decisions, which could make the path of CAD more uncertain in the future.
In the meantime, the USD/CAD could continue to find support from positive economic data releases and improvements in investor sentiment. Markets will likely pay close attention to upcoming data releases, including Canadian employment figures and GDP growth, as well as US-China trade negotiations and other global developments that could impact the currency pair.
The Canadian Dollar’s potential for short-term gains should not be overlooked, as it may provide trading opportunities in the near term. However, investors should remain cautious and consider the longer-term outlook for the currency as well, as there are risks and uncertainties that could limit its potential for sustained outperformance.
In conclusion, while the Canadian Dollar may be on track for a lower weekly close and has some scope for short-term outperformance, it remains to be seen if it can hold its ground in the face of broader headwinds. Traders should keep a close eye on economic data releases, central bank communications, and global developments to inform their investment decisions and manage potential risks. The path of the USD/CAD will also depend on the future direction of the US Dollar, which has been under pressure in recent weeks due to uncertainties surrounding the Federal Reserve’s policy and US economic growth prospects.