Brown Brothers Harriman (BBH) strategist Elias Haddad highlights that the Canadian Dollar (CAD) underperformed as weaker Oil and an unexpected technical recession hit sentiment. With Q1 Gross Domestic Product (GDP) contracting and labor data showing rising slack, Haddad argues that current Bank of Canada (BoC) hike pricing looks too aggressive and sees scope for USD/CAD to overshoot toward resistance at 1.3930, the January high, as rate expectations adjust lower.

Weak growth challenges BoC pricing

"CAD underperformed most major currencies last week undermined by a decline in crude oil prices and Canada’s economy unexpected entry into technical recession."

"Canada real GDP fell at an annualized pace of -0.1% in Q1 (consensus and Bank of Canada projection: 1.5%) and the contraction in Q4 was revised 0.4ppt higher to -1.0%. The decline in Q1 GDP may be exaggerated by a surge in gold imports. But the outsized positive contribution from inventories (+1.1ppt) suggests underlying growth is weak."

"Canada’s May labor force is due on Friday. The economy is expected to add +10.0k jobs in May vs. -17.5k in April and the unemployment rate is forecast to remain at 6.9% for a second straight month. Overall, Canada’s labor market is showing increasing signs of slack with employment contracting by an average of -29k in the three months to April. In parallel, measures of core inflation are either at or below the BOC’s 2% target."

"Bottom line: there is plenty of room for BoC rate hikes bets (50bps in the next 12 months) to adjust lower against CAD. USD/CAD risks a modest overshoot towards technical resistance at 1.3930, the January high."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)