Can Canadian Dollar's "Mini Dollar Status" Keep It On Top?

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The Canadian Dollar will appreciate against the Euro, Pound and U.S. Dollar over the duration of 2024, according to the latest currency research update from the Royal Bank of Canada (RBC).

The Canadian Dollar is already one of 2024's best-performing currencies, tending to track the outperformance of the U.S. Dollar, which prompts RBC analyst Daria Parkhomenko to brand it a mini-dollar.

"The currency was one of the main outperformers on the crosses on the back of its 'mini-dollar' status and CA 2Y swap rates seeing one of the larger rises in G10 YTD," says Parkhomenko in RBC's latest monthly currency research update.

Expectations for Bank of Canada interest rate cuts have retreated over recent weeks, leading to a rise in short-term Canadian bond yields (hence, Canadian two-year swap rates are one of the larger rises in G10, as per Parkhomenko's comment).

But Canadian swap rates aren't rising in isolation; they are tracking developments in the U.S. economy, hence why the Canadian Dollar is referred to as a mini-dollar by Parkhomenko.

Therefore, further U.S. Dollar outperformance can benefit the Canadian Dollar against other non-USD currencies.

As we can see below, the Canadian Dollar is 2024's third-best performing major currency behind the Dollar and Pound, which have both benefited from a notable repricing in investor expectations for the scale of rate cuts that will come from the Federal Reserve and Bank of England in 2024.

Above: CAD performance in 2024. Track CAD with your own custom rate alerts. Set Up Here

The year has seen rate cut expectations scaled back amidst ongoing robust data and stubborn inflation, which leaves the central banks unwilling to commit firmly to cutting interest rates.

The Bank of Canada is unlikely to cut soon either, says Parkhomenko: "in January, the BoC’s characterisation of underlying inflation erred on the hawkish side."

RBC expects the Bank of Canada will first cut in June and deliver a total of 100bps of cuts this year. This would mean the Bank starts the cutting cycle alongside the U.S. Federal Reserve, which will also cut rates in June, according to RBC's economists.

"If central banks are making 'adjustment' cuts instead of substantial ones due to significant growth concerns, then global central banks reducing rates in H2 2024 and a potential turn in the global business cycle may benefit CAD, given CAD is likely to be one of the main candidates for the market expressing a view on global growth," says Parkhomenko.

RBC Capital holds point forecasts of 1.34 and 1.36 for end-Q1 & end-Q2 on the marginally stronger USD embedded into our forecasts for H1 2024, "but we want to emphasise that our base case is for USD/CAD to be range-bound (~1.3100-1.3600)," says Parkhomenko.

The exchange rate is then seen at 1.31 by year-end, from 1.3542 at the time of writing.

The Euro to Canadian Dollar exchange rate is forecast at 1.44 by mid-year and 1.41 by year-end, it is at 1.4531 at the time of writing.

The Pound to Canadian Dollar exchange rate - currently at 1.6980 - is forecast at 1.70 by mid-year and 1.63 by year-end.