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Research from Société Générale reveals just how vulnerable the Canadian Dollar is to a fresh lurch lower.
New analysis from the investment bank's FX strategy and research team shows interest rate differentials - the difference in rates in Canada and the U.S. - have recently moved in the USD's favour.
The differential as measured on five-year bond yields has expanded by 23p relative to levels seen after the release of U.S. labour market statistics at the start of September.
The inference is that this pulls up the USD/CAD as money chases higher interest rates. Indeed, the exchange rate rose 1.28% last month, from 1.3735 to 1.3920.
"The rate differential is the better predictor of where this pair goes, but is the widening growth gap going to lead rate expectations?" queries Kit Juckes, lead FX analyst at Soc Gen.
He presents a chart showing how the market is anticipating U.S. and Canadian growth to diverge this year:
The chart shows the consensus expectations of major economists regarding U.S. and Canada GDP for 2025, revealing a widening gap in favour of U.S. growth.
The inference is that the U.S. will need to command higher interest rates as a result, swaying interest rate differentials further in favour of the USD over the CAD.
"There is certainly scope for an acceleration higher in USD/CAD if 1.40 breaks, and a break is possible if next week’s Canadian employment data are soft," says Juckes.