-- Deutsche Bank sees the Canadian dollar (CAD or loonie) rising only "modestly" versus the US dollar (USD) this year while lagging G10 peers, before expecting a larger rise in 2027.
The Canadian economy remains "lackluster" -- gross domestic product growth is barely positive and inflation has dropped back to around the target, noted the bank.
Canada is caught between the fading of old growth drivers -- robust growth in population, house prices and exports -- and the hope of the new, such as more capital expenditure, and diversified export markets, stated Deutsche Bank.
The direction is "encouraging," and the BoC business survey (BOS) last week perked up in Q1, but this agenda will still take time to bear fruit, it pointed out. Pipelines aren't quick to build, especially with a wide array of stakeholders, and businesses in general need to be persuaded to recalibrate and invest.
The current energy shock has affected sentiment, especially for households that already face the weakest labor market conditions in the G10, added the bank.
Higher energy prices at least will help the trade balance, and the financial account continues to be a story of equity outflows offset by debt inflows -- notwithstanding CAD's relatively low carry.
The USMCA trade deal renegotiations set for mid-year pose two-way risks to CAD, while a further rise in hedging by pension funds from extremely low levels could help the currency over time, according to Deutsche Bank.