The Canadian dollar, albeit proving relatively resilient to a strengthening U.S. dollar so far, is set to weaken against the greenback as the country's debt issue prompts the Bank of Canada to struggle keeping up with Federal Reserve interest-rate increases.
“There is nothing to like about the CAD at this time,” TD Securities strategist Mazen Issa wrote in a note to clients Monday. “The debt party that has supported the last two major expansions is over and the CAD will need to act as a relief valve for the macro imbalances that exist in the household sector as rates push higher.”
Issa sees a record jump in household debt servicing ratios by the end of 2022 in a move that "should prevent the BOC from keeping up with the Fed."
In its most recent rate decision, the BOC lifted its policy rate by 75 basis points to 3.25% to tame inflation. Before that, the central bank hiked its key rate by a full percentage point to 2.5%. While the Fed's current target range for the fed funds rate stands at 2.25%-2.50%, Wall Street is pricing in a terminal rate of as high as 4.25% by early 2023.
The BOC's terminal rate, by comparison, has likely neared already, Issa said.
Over a one-month horizon, he recommended buying USD/CAD with a target of 1.35 and a stop-loss at 1.3180. The loonie is changing hands at 1.3273 per U.S. dollar at the time of writing.
Related ETFs: iShares MSCI Canada ( NYSEARCA: EWC ), Franklin FTSE Canada ( NYSEARCA: FLCA ) and Invesco CurrencyShares Canadian Dollar Trust ( NYSEARCA: FXC ).
Previously, (Aug. 16) Canada's inflation rate slows in July .
For further details see:
Loonie called a short at TD as Canada's debt issue prompts BOC to fall behind Fed