The threat of tariffs from United States President Donald Trump on Canadian imports could be a negotiating tactic but doesn't augur well for the Canadian dollar (CAD or loonie) in the short term, said Societe Generale.
The Bank of Canada will retain a dovish bias after pledging at the last meeting to slow the pace of rate cuts, states SocGen.
The loonie is attractive based on bond spreads but the pair is overshooting and without an agreement on trade before Feb. 1 new lows aren't ruled out, wrote the bank in a note to clients. Inflation in Canada returned inside the central bank target range of 1%-3% last year.
Tuesday's headline consumer price index at 8:30 a.m. ET is forecast to be soft at 0.4% month-over-month deflation and unchanged at 1.9% year over year thanks to the two-month sales-tax break by the Canadian government to support domestic demand, added SocGen.
In the Q4 business survey (BOS) of the BoC published Monday, companies are beginning to anticipate improvements in sales activity, pointed out the bank. Companies expect sales growth to improve over the coming year, supported by recent interest rate reductions and the anticipation of further cuts.
Uncertainty about the effects of the new U.S. administration is prevalent, with firms commonly anticipating higher input costs due to trade tensions.
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