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The Bank of Canada is marching towards its first interest rate cut, and this will keep the Canadian Dollar on the back foot until the second half of 2024, according to a new currency research note from one of Canada's biggest banks.
The National Bank of Canada says the Canadian Dollar's ongoing slide has been exacerbated by a series of weak economic reports, which has prompted markets to boost expectations for a Bank of Canada rate cut.
Canadian CPI inflation rose 3.8% year-on-year in September, said Statistics Canada, which makes for a sharp decrease from 4.0% in August and was below expectations for a reading of 4.0%.
Meanwhile, a 0% GDP change for August confirmed the economy was likely on track to deliver inflation levels far below what the Bank of Canada is currently forecasting.
The Canadian Dollar came under particular pressure in early November following news Canada's unemployment rate rose to 5.7% from 5.5%, which was above the 5.6% the market was expecting.
But analysts at NBC also see global factors as being unsupportive, particularly given the recent slide in oil prices, a key Canadian export.
"The CAD is currently facing the double whammy of a widening interest rate differential with the US and weaker commodity prices due to a slowing global economy," says Stéfane Marion, an economist at NBC's markets division.
NBC expects USD/CAD to converge towards 1.42 in the coming months and "don't see much room for CAD appreciation until the second half of 2024," says Marion.
The U.S. Dollar is meanwhile likely to remain firm: "If you believe, as the Fed does, that a soft landing for the economy is on the horizon, this scenario would imply a weaker USD going forward. This is not our forecast."
The bank's research finds the USD is likely to strengthen on fears of a global recession and renewed geopolitical tensions in the Middle East, which will drive safe-haven demand until the Fed is able to pivot and announce an easing of monetary policy.
Regarding the euro, the economic situation in the Eurozone is still considered unsupportive and the European Central Bank has likely reached the endpoint for tightening monetary policy.
"While the euro has edged up recently, it was underpinned by a weaker US dollar. We continue to see weakness for the European currency in the coming quarters with the potential for some improvement later in 2024," says Marion.
Pound Sterling Live notes the tight range in the Euro-Pound exchange rate over recent months, and given expectations for this to continue, the Pound can continue to echo the Euro's fundamental drivers.
NBC forecasts the Dollar-Canadian Dollar exchange rate to end 2023 at 1.38, Q1 2024 at 1.42, Q2 2024 at 1.40 and Q3 at 1.37.
The Pound-Canadian Dollar exchange rate forecast profile is 1.66, 1.68, 1.69 and 1.69 for the same points in time.
For the Euro-Canadian Dollar, the targets are 1.44, 1.46, 1.47 and 1.47.