08:35 AM EST, 12/11/2024 (MT Newswires) -- Ahead of the Bank of Canada policy Wednesday on Wednesday -- consensus is looking for another jumbo 50bps cut to 3.25% and for the policy rate to drift lower to 2.25% next year, which would be nearly 150bps below where investors think the Federal Reserve will take the funds rate -- the Canadian dollar (CAD or loonie) is weakening towards C$1.42, the weakest level since the peak of the COVID-19 crisis back in April 2020, noted Rosenberg Research.

The Canadian dollar is now down 6.5% so far this year).

Canada's economy is very weak, barely expanding in volume terms and underperforming the BoC's projections, said Rosenberg Research. The disinflationary output gap is expanding even as underlying inflation has broadly moved to the central bank's target; the unemployment rate, at 6.8%, has drifted up to a seven-year high outside of the pandemic; and then there United States President-elect Donald Trump's tariff hike to consider.

Canada has little room to respond outside of sanctioning an even weaker currency -- to offset the 25% tariff impact, the Canadian dollar would have to pierce C$1.60, stated Rosenberg. The BoC would have to cut rates another 150bps beyond what is already priced in.

It would be a sub-1% policy rate at a time when investors don't seem to think the Fed will do more than bring its comparable to 3.7% next year, added Rosenberg. This would represent an unprecedented yield gap.

For bond investors, the implications are unambiguously positive, and for equity investors, wide swaths of the products sector should be avoided -- Materials, Industrials, Consumer Goods -- but there is a long list of services that are immune from trade friction that would see a huge benefit like the Banks, Telecom, Utilities from lower rates.

The plunge in the Canadian dollar would unleash a domestic travel and tourism boom -- the hotels and air carriers will be filled with bargain-hunting US visitors. Donald Trump will be facing a new border problem -- a flood of Americans going to Canada for a very cheap vacation, according to Rosenberg.