Turning bearish on CAD as recession odds mount

After remaining relatively range-bound for most of 2023, deteriorating risk appetite and growing geopolitical risks have led the Canadian dollar to depreciate towards its year-to-date lows. Due to offsetting cross-currents and a shifting market environment, we now expect the loonie to remain weak over the near term, and have turned neutral on USDCAD over a 3 month horizon. Over the medium term, however, a growing number of signals suggest the Canadian economy will enter a recession in 2024, which would see the Bank of Canada cut rates earlier and more aggressively than market pricing currently implies. With markets viewing the BoC as more hawkish than the Fed, we believe there is considerable scope for interest rate differentials to widen as recessionary conditions become increasingly evident in the data. Under our base case, USDCAD could intermittently break through 1.40 as early as 2024 Q1.

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

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