Canadian Dollar Weakness A High Conviction View At Major North American Bank

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Canadian Dollar weakness over the coming months is a high conviction view at Wells Fargo, the North American bank.

Analysts say in a new research briefing they expect the Canadian Dollar to underperform the U.S. Dollar amidst a further slowdown in the Canadian economy. However, the same research shows the British Pound will underperform to a greater degree, resulting in a downward profile for the GBP/CAD exchange rate.

"With economic developments in Canada also less constructive, we have turned more pessimistic on the prospects for the Canadian dollar over the next few quarters," says Nick Bennenbroek, International Economist at Wells Fargo.

Amongst Wells Fargo's High Conviction calls, as of the end of October, is an expectation for the Canadian Dollar to underperform through early 2024.

"Despite steady employment gains, broader demand and output growth have been subdued in recent months, and survey data and leading indicators point to a possible further slowing going forward," says Bennenbroek.

At the turn of the month, Canada reported 0% month-on-month growth was registered in August, which was unchanged from July's 0% but below the consensus expectation for 0.1% growth.

"The Canadian economy is already skirting a recession, with preliminary industry data for Q3 suggesting the possibility of a further slight contraction in activity to follow Q2's surprise decline," says Andrew Grantham, an economist at CIBC Bank.

Canada's deteriorating growth has prompted economists to warn the next move at the Bank of Canada will be a rate cut, which can weigh on the Canadian Dollar's prospects going forward.

Wells Fargo says Canadian inflation is also gradually heading lower, leading its economists to believe the Bank of Canada has completed its rate hiking cycle and that rate cuts could begin in Q2-2024, ahead of the Federal Reserve.

"The contrast between resilient U.S. activity and slowing Canadian activity, along with relative monetary policy trends, should weigh on the Canadian dollar in the months ahead. We target a USD/CAD exchange rate of CAD1.4000 or beyond by Q1-2024," says Bennenbroek.

Wells Fargo expects the U.S. dollar to also strengthen on demand for safe-haven currencies as geopolitics remain tense for the time being.

Meanwhile, economic trends are said to be deteriorating in Europe, and it is expected that currencies such as the Euro and British Pound will be the notable underperformers through Q1-2024.

Wells Fargo forecasts the Dollar to Canadian Dollar exchange rate at 1.3900 by year-end, 1.4000 by the end of the first quarter of 2024, 1.3800 by the end of June and 1.3700 by the end of September 2024.

The GBP/USD forecast profile is 1.1900, 1.1700, 1.1600 and 1.1700 for this timeframe, giving a Pound to Canadian Dollar exchange rate forecast profile of 1.65, 1.64, 1.60 and 1.6030.