Brown Brothers Harriman (BBH) strategist Elias Haddad points out that the Canadian dollar (CAD) underperformed due to weaker crude oil and an unexpected technical recession. With Q1 Gross Domestic Product (GDP) sinking and labor market data showing growing gaps in the labor market, Haddad says the current Bank of Canada (BoC) rate hike looks too aggressive and predicts USD/CAD could break through towards resistance at the January high of 1.3930 as interest rate expectations ease.

Weak growth poses a challenge for BoC prices

“The CAD underperformed most major currencies last week, weakened by the decline in oil prices and the Canadian economy unexpectedly entering a technical recession.”

“Canada’s real GDP declined at an annual rate of -0.1% in the first quarter (Bank of Canada consensus and projection: 1.5%), and the fourth-quarter contraction was revised upwards by 0.4 percentage points to -1.0%. The decline in GDP in the first quarter may be exaggerated by the sharp increase in gold imports. However, the excessive positive contribution from inventories (+1.1 percentage points) suggests that underlying growth is weak.”

“Canada’s May labor force release is due on Friday. The economy is expected to add +10,000 jobs in May, compared with -17,500 in April, and the unemployment rate is expected to remain at 6.9% for the second month in a row. Overall, the Canadian labor market is showing increasing signs of slack, with employment falling by an average of -29,000 in the three months to April. At the same time, core inflation measures are on par with the BOC’s target of 2% or below.”

“Bottom line: There is ample room for BoC bets on interest rate hikes (50 basis points over the next 12 months) for a downward correction vs. CAD. There is a risk of USD/CAD slightly overshooting towards technical resistance at 1.3930, January’s high.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)