Analysts at Deutsche Bank and JPMorgan see the Canadian dollar weakening in the near term as Canadian inflation cools, easing pressure on the Bank of Canada to raise interest rates and eroding the loonie's yield advantage against the U.S. dollar.
Deutsche Bank and JPMorgan issued a bearish outlook for the Canadian dollar, specifically citing cooling inflation. Softer price pressures reduce the necessity for the Bank of Canada to continue hiking rates, narrowing the interest rate differential with the U.S. dollar and undermining CAD's yield appeal.
It suggests the pair could rise as the Canadian dollar weakens against the greenback, with the cooling inflation outlook acting as a catalyst for further upside.
No specific levels were mentioned, but the bearish bias implies potential for a breakout above recent ranges if rate differentials continue to widen.
Any hawkish surprise from the Bank of Canada or a resurgence in Canadian inflation could shift rate expectations and strengthen the loonie, challenging the USD/CAD upside.
Deutsche Bank and JPMorgan have turned bearish on the Canadian dollar, citing cooling inflation that dents the case for further Bank of Canada tightening. The shift in rate expectations undermines the loonie's carry appeal against the greenback. With Canadian inflation prints trending lower, the pair sees fresh downside as yield differentials widen in favor of the U.S. dollar.
They cite cooling Canadian inflation, which reduces the likelihood of further interest rate increases by the Bank of Canada, weakening the loonie's appeal.
With inflation trending lower, the central bank is less pressured to hike rates, potentially ending its tightening cycle earlier than previously expected, which would undercut the Canadian dollar.
If Canadian yields fall relative to U.S. yields, USD/CAD could climb as investors shift toward the higher-yielding dollar, pushing the pair higher.