Canadian Dollar Weakness Set to Fade Predicts Corpay

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The Canadian Dollar lost ground against the U.S. Dollar, Pound and Euro last month, but a leading international payment specialist says losses won't extend as far as some fear.

"Although the exchange rate has now breached our year-end target, we're not sure losses will extend as far as some observers seem to fear," says Karl Schamotta, Chief Market Strategist at Corpay.

The Pound to Canadian Dollar exchange rate lost nearly two-thirds of a per cent in value in April, closing at 1.7210. Against the Euro, the Canadian Dollar lost 0.60%. The headline Dollar-Canadian Dollar exchange rate lost 1.80% to close at 1.3777.

The Canadian Dollar ended April on a soft footing after Canadian GDP for February and March were the latest prints to disappoint. Statistics Canada said its preliminary GDP estimate for March was a flat 0% month-on-month, disappointing against expectations for growth of 0.2%.

The February print was revised lower to 0.2%, disappointing against expectations for 0.3% growth. "Momentum in the Canadian economy appears to have faded quickly as the first quarter progressed," says Andrew Grantham, an economist at CIBC.

Following the release, money markets firmed expectations for a June rate cut at the Bank of Canada, softening Canadian bond yields relative to those of other countries.

Schamotta says the Canadian Dollar is still on the defensive following the disappointing gross domestic product print translates into wider rate differentials across the curve, but there is reason to believe further losses will be limited.

"Although the exchange rate has now breached our year-end target, we’re not sure losses will extend as far as some observers seem to fear. Although a slew of recent economic data releases have shown the economy slowing relative to its US counterpart, this has long been priced in, and the performance gap could narrow in the months ahead as real estate activity rebounds and exogenous demand helps boost Canadian exports and investment," says Schamotta.

He adds that expectations for divergence between the two North American central banks might narrow over time as growth trajectories are revised toward more moderate levels, and a recovery in the loonie remains distinctly plausible.

The Bank of Canada is facing slowing growth momentum and fading inflationary pressures. Mid-month, the Canadian Dollar came under pressure after it was reported inflation rose 2.9% on a year-over-year basis in March, following a 0.6% month-on-month gain that underwhelmed against expectations for a rise of 0.7%.

The weak end to the quarter for growth also means downside risk for the Bank of Canada's expectation for 1.5% annualized growth in Q2.

"We always suspected that strength at the start of the year largely reflected an easing of previous supply constraints and the effects of better than normal winter weather, and that the economy could stall again thereafter," says CIBC's Grantham.