UBS analysts pointed to the possibility of the Bank of Canada (BoC) cutting interest rates before the US Federal Reserve amid concerns about an economic slowdown.

As a result, the Canadian dollar (CAD) is expected to face only moderate inflationary pressure from the weaker currency. UBS predicts that the first BoC rate cut could come in the summer, possibly in July, which could provide short-term support for CAD.

Closely linked to the United States, the Canadian economy is experiencing divergence as manufacturing sectors around the world weaken, limiting cross-border economic impacts.

Canada’s circumscribed fiscal support and consumer sensitivity to high interest rates have contributed to a sharper economic downturn compared to its Canadian counterpart. This sets the stage for a BoC rate cut, potentially preceding an easing of Fed policy.

UBS suggests that while the CAD could benefit somewhat from the BoC’s decision to keep rates on hold at next week’s policy meeting, the impact of US factors on exchange rates is likely to limit the BoC’s influence.

The company anticipates that CAD may gain later in the year as the U.S. dollar weakens and the Fed eases policy, supported by a changing interest rate outlook and improved risk attitudes.

On the investment front, UBS notes that while a BoC bond hold could initially favor CAD, subsequent interest rate differentials could be negative.

However, once broader USD weakness emerges, CAD is expected to benefit. The resistance level for this pair remains at 1.3850, with support at 1.34 and 1.32. UBS prefers selling call strategies with strikes near the resistance level.

The analysis also indicates risk factors that may lead to increases in the USD/CAD pair, including a challenging landing in the USA, Canada or around the world, a significant drop in energy prices and a more pronounced cycle of monetary policy easing by the BoC.

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