The Canadian Dollar (CAD) has performed poorly once again this year. Only the Japanese yen and the New Zealand Dollar (NZD) have appreciated less against the US Dollar (USD) than the CAD after a period of weakness in recent months, Commerzbank’s FX analyst Michael Pfister notes.
CAD is likely to strengthen against a weak USD
“The reasons for this are clear: the Canadian real economy is suffering greatly from US tariffs, prompting the central bank to cut interest rates further. However, the CAD is also indirectly affected by the tariffs. If the US economy weakens, Canada will suffer too, due to the close links between the two countries’ economies. In short, Canada is being hit twice as hard as other countries.”
“We expect this to continue in the coming year. Although we expect the Canadian real economy to stabilize, this will likely be at a weak level. Plus, while the labor market will have to cope with a lower labor supply, it is still likely to be affected by the poor outlook. There is a clear risk that this situation will persist until a deal can be reached with the US.”
“Nevertheless, we expect lower USD/CAD levels. This is mainly due to our expectation of a weaker USD, given the attacks on the Fed’s independence and the significant interest rate cuts that our economists expect. Basically, we expect this year’s trend to continue. The CAD is likely to strengthen against a weak USD, but will probably continue to struggle against other currencies.”