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Rosenberg Research Sees Canadian Dollar Recovery Ahead, But Upside Remains Capped

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There's room for a "modest" recovery in the Canadian dollar during the second half of the year, but

Rosenberg Research said the upside for the loonie is capped by structural issues.

"This is very much a fading U.S. dollar story rather than a positive Canadian dollar one," Rosenberg Research said in a note. The currency traded at C$1.4083 recently on Wednesday, up 0.2% against the greenback.

The 50-basis-point widening in the U.S.-Canada two-year yield spread that weighed on the loonie in the first half is expected to unwind as U.S. yields fall, the Federal Reserve turns less hawkish and the Bank of Canada shows limited urgency to raise rates, said Rosenberg.

Despite potential near-term support, the Canadian dollar's upside remains capped by structural weaknesses such as declining competitiveness, limited productivity gains, subdued investment, and persistent uncertainty around U.S. trade policy, added Rosenberg. This week's announcement of new targeted tariffs against Canada reinforces these concerns, the firm said.

The main risk to the loonie recovery story is a renewed Middle East escalation that sparks safe-haven demand for the greenback, said Rosenberg.

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