USD/CAD: Risk appetite to be challenging for a while longer, weighing on the loonie – HSBC

Central bank pivots create interesting dynamics for FX, explaining the recent decline in USD/CAD. But risk appetite remains the dominant driver of the Canadian dollar, economists at HSBC report.

Central bank pivots create interesting dynamics

“For FX, central bank pivots are at the height of financial market fashion and raise interesting questions. On the one hand, individual shifts towards a less hawkish stance continue to be associated with local currency weakness. But on the other hand, the collective shift towards slower tightening appears to be boosting risk appetite, which conversely favours many of the currencies where central banks have pivoted.”

“In the end, risk appetite remains the dominant driver of the CAD. With the US Federal Reserve and the BoC still in the mood to tighten, the outlook for economic growth and risk appetite is set to be challenging for a while longer, probably weighing on the CAD.”