The Canadian dollar remains one of the weakest-performing G10 currencies despite signs of improvement in the domestic economy, with US trade policy continuing to pose the biggest risk, according to Commerzbank Research in a note Tuesday.
The Canadian dollar initially benefited from higher oil prices, but subsequent declines in energy prices and changing interest-rate expectations have weighed on the currency, said the bank.
Canada's economic recovery is picking up pace, but US trade policy remains the biggest risk to the outlook. Potential 50% tariffs on certain Canadian goods from Wednesday, along with ongoing uncertainty surrounding the US-Mexico-Canada Agreement (USMCA) on trade, could weigh on the country's economic recovery
"The focus is likely to remain on the oil price in the short term," wrote Commerzbank FX Analyst Michael Pfister in the note. "In the medium term, however, it is primarily the outcome of the negotiations with the US that will determine whether the upturn is sustainable."
The outcome of USMCA negotiations with the US will be critical to the Canadian dollar's outlook, added Pfister.
If Canada's economic recovery proves durable, the Bank of Canada could eventually begin raising interest rates, potentially giving the loonie room to strengthen, said Commerzbank.