07:16 AM EDT, 08/02/2024 (MT Newswires) -- Canada's economic ties with the United States aren't as helpful as in the past, given they first and foremost revolve around manufacturing sectors rather than services, which is what has driven the latest bout of US growth, said UBS.

In addition, Canada lacks big-ticket fiscal support packages and with Canadian consumers more exposed to high interest rates via mortgages, the resulting economic slowdown has inevitably been more pronounced, wrote the bank in a note to clients. As a result, growth has slowed, though inflation has also come down.

This led the Bank of Canada (BoC) to embark on rate cuts-rightly so, in the view of UBS.

UBS also expects the Canadian central bank to keep easing policy further at upcoming meetings. The bank asks if this actually matters for the Canadian dollar (CAD or loonie).

Canadian rates have repriced quite markedly to account for this policy pivot, stated UBS. Surprisingly, this has had little effect on the Canadian dollar.

Instead, news from across the border has influenced the currency much more significantly, according to the bank. Investors have very carefully weighed any data print from the US and Federal Reserve commentary.

UBS thinks relative rates have a tad further to run, but what it believes will likely push USDCAD lower will come from the US side. The US dollar (USD) should weaken once the Fed embarks on its easing cycle, which the bank thinks should start in September.

Lastly, UBS noted that positioning has become fairly extreme in the CAD, with large shorts built by the speculative community, leaving USDCAD vulnerable to a sharper correction if they are squeezed. Indeed, the bank believes the pair will trade lower over time.

Rate differentials will likely continue to be CAD-negative in the

short run, but once broader USD weakness takes hold later in the year, USDCAD should depreciate, according to UBS.