USD/CAD: We keep a bullish bias  - Deutsche Bank

According to analysts from Deutsche Bank, the Loonie (CAD) is likely to trade lower against the US dollar amid some negative factors persisting in the Canadian economy. 

Key Quotes: 

“CAD has been bounced between an extremely weak Q4 and poor leading indicators on one hand, and oil-price strength on the other, which we think is fundamentally sustainable. The corresponding dovish shift now has the market pricing a policy rate cut (-3 bps for July) in light of the widening output gap in December (-0.4%). The risk is that the transitory weakness, now expected the last for all of H1, develops into a longer lasting downturn.”

“The Bank of Canada will remain in a holding pattern for the near term which appears sensible in the context of the Fed pause and the fact that the current gap in US-Canada policy rates is equal to that observed at the peak of the last two policy cycles.”

“Tentative signs of a rebound in manufacturing sales (Jan) and wage growth (Feb), together with further oil-price upside should reduce the probability of more extreme scenarios (e.g., USDCAD at 1.40). However we keep a bullish bias (targeting USDCAD 1.36 by year-end) in light of longer-lived negative factors persisting, as the housing market remains a drag on construction, and household consumption growth is limited by debt service ratios reaching a record high.”