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The Canadian dollar is vulnerable to further weakness as the Bank of Canada is set to leave the door open to further interest rate cuts at next week's meeting.
According to a new analysis from ING Bank, the Bank of Canada will slice another 25 basis points off its basic rate on October 29, and indicate further cuts are still possible.
"The door may be left open to more easing, and CAD should remain vulnerable against most of the G10," says Francesco Pesole, FX Strategist at ING Bank.
The need to lower rates further rests on lingering trade-induced uncertainty, which continues to weigh on Canadian activity and carries risks of broader jobs market deterioration.
However, uncertainty about how the Bank will proceed has risen, with investors reducing expectations for the scope of further Bank of Canada cuts after October's 'hard' data came in firmer than anticipated: 60k jobs were added to the economy in September and inflation rose faster than expected at 2.4% year-on-year.
Despite this, "activity and jobs picture remains grim," says James Knightley, Chief International Economist at ING. "Uncertainty around trade policy continues to weigh heavily on investment and hiring plans."
Above: "Unemployment can rise further, based on BoC survey result" - ING.
Also, the inflation outlook is not as bad as it seems, with the Bank of Canada's own sentiment survey showing limited inflationary risks on the horizon. "Weaker demand is limiting their ability to pass higher costs through to their selling prices," says Smith.
Given this, he thinks "it will be hard to shut the door to more cuts."
Should the Bank cut rates and keep the door open to further easing, the market will adjust accordingly, leaving CAD "vulnerable in the crosses," says Pesole.
"Crosses" refers to non-USD Canadian dollar exchange rates, for example, the pound into Canadian dollar conversion.
Regular readers will note we have regularly flagged that the Canadian dollar's fortunes are also closely aligned with those of the U.S. Dollar, ensuring the pair oftentimes trade as a North American bloc.
ING confirms the Canadian dollar has less of a negative correlation to the U.S. dollar than other currencies, meaning that, for example, GBP/USD can lead GBP/CAD.
Given this, many CAD exchange rates will be vulnerable to further U.S. dollar strength, but would likewise benefit from U.S. dollar weakness.
ING thinks the economic picture in the U.S. will deteriorate from here, with job market and inflation numbers pointing to more Fed cuts beyond the three currently priced in by March 2026.
"That should pair with BoC easing in placing CAD in an unfavourable position against any other G10 currency outside of the USD," says Pesole.
Taking the other side of any CAD-bearish positioning is Bank of America, where currency strategists think the outlook has improved somewhat.
"We expect the BoC to hold its policy rate steady at 2.50% on October 29, though the risks are tilted toward a 25bp cut," says BofA in a strategy note released Monday.
With the market predicting a cut, any decision to keep rates unchanged will surely benefit CAD.
"Risk/reward favours positioning for lower USD/CAD," says BofA.