Recently, the Canadian dollar rebounded from its weakest level since 2003, but the sustainability of this rebound has raised widespread concerns among analysts. John Velis, a strategist at the New York Bank, noted that although the Canadian dollar has rebounded, he remains doubtful about whether this recovery can be sustained.
Velis pointed out that on February 3, the USD/CAD exchange rate once rose to 1.4793, affecting the exchange rate between the Canadian dollar and the US dollar and causing volatility in other currency pairs. Although there has been a short-term recovery of the Canadian dollar, some analysts believe that Canada's economic environment remains uncertain, especially influenced by trade tariff policies, which may limit the potential for further appreciation of the Canadian dollar.
Velis emphasized that Canada is currently in a "tariff limbo," which has negatively impacted market sentiment. Since the beginning of the year, the volatility of the Canadian dollar has been relatively high, ranking fifth from the bottom in the risk-reward ratio among more than 30 major currencies. The Canadian dollar is not a typical high-yield currency, and the risk-return on investing in it is low.
Nevertheless, with the agreement reached between Trump and Canadian Prime Minister Trudeau to suspend impending tariffs, the Canadian dollar rate rebounded in early February, with USD/CAD falling to 1.4346, while GBP/CAD and EUR/CAD also dropped. This rebound was mainly driven by the news of the US-Canada trade agreement pausing tariffs.
However, the New York Bank believes that the short-term recovery of the Canadian dollar does not change its long-term weak outlook. Analysts argue that the "significant correlation" between the Canadian dollar and the US-Canada two-year bond yields will soon re-emerge, especially considering the monetary policy differences between the two countries. The Bank of Canada may adopt a more aggressive policy, further increasing depreciation pressure on the Canadian dollar.
Additionally, Goldman Sachs analysts also pointed out that if the Canadian dollar reacts typically to changes in trade conditions, it could depreciate by about 13%, with overall tariffs expected to reach 25%. Despite initially lower tariffs on energy products, considering the uncertainty of the economic environment, Goldman still regards this forecast as a reasonable theoretical endpoint.
