USD/CAD: Loonie to extend its underperformance given domestic concerns – MUFG

The Canadian dollar has underperformed for the second consecutive month in August declining by -1.2% against the US dollar. Negative domestic risks are leading to the loonie underperformance, a trend that should continue in the coming weeks, according to economists at MUFG Bank.

See: USD/CAD to remain above 1.26 as Canadian GDP surprisingly contracts – OCBC

Loonie already trading weak relative to short-term drivers

“The Canadian economy unexpectedly contracted in Q2 by an annualized rate of – 1.1% following the expansion of 5.5% in Q1.”

“The Bank of Canada (BoC) had been expecting the Canadian economy to expand by 2.0% (QoQ at annual rates) in Q2 and 7.3% in Q3 in their July Monetary Policy Report, and by 6.0% for 2021 as a whole. Those optimistic expectations will now need to be revised significantly lower and will encourage the BoC to be more cautious over their plans to continue tightening monetary policy.”

“The BoC is now unlikely to slow the pace of QE purchases further at their next meeting on 8th September and maintain at CAD2 B per week. At the same time, the Canadian interest rate market has pared back expectations for BoC rate hikes.” 

“The weak growth data will add to uncertainty as well over the outcome from the snap election to be held on 20th September. Recent opinion polls have shown a pick-up in support for the Conservative party. The tightening race increases the risk that Prime Minister Trudeau’s decision to call an early election will backfire.”

“The Canadian dollar should continue to underperform in the coming weeks although our short-valuation model suggests that a lot of bad news is already priced in at levels above 1.2500 for USD/CAD.”