The US dollar against the Canadian dollar advanced last week to Deutsche Bank Research's target of $1.41, though part of the move reflects broader strength in the greenback.
Lagging most G10 peers, the Canadian dollar continues to struggle, with Deutsche Bank maintaining a bearish view on the loonie, according to a blog published on Wednesday.
"There's little in economic momentum to inspire us yet," wrote Tim Baker, Macro Strategist at the bank.
With the Canadian economy and employment essentially flat over the past six months, the overall picture remains soft despite tentative signs of improvement in the second quarter, said Deutsche Bank.
A roughly 15% rise in exports has eliminated Canada's trade deficit, with additional support from strong portfolio inflows. But this strength may be peaking, as exports are concentrated in energy and gold, and bond inflows hit a record in April, which cautions for limited durability, added the bank.
The loonie has broadly tracked rate differentials, but spreads are likely to move further against Canada as Bank of Canada pricing looks stretched versus weak growth and inflation, with markets pricing a Federal Reserve-like path despite weaker fundamentals, stated Baker.
This week's bank capital rule changes may slightly support credit growth in Canada, but they aren't enough to shift the outlook, keeping Deutsche Bank bearish on the Canadian dollar for now.