Barclays' research suggests that traders should buy USD/CAD on dips, as the Canadian dollar may perform poorly as the US economy moves towards a soft landing and the Federal Reserve begins to cut interest rates.

In a recent research report, Barclays strategists stated: "Canada relies on the United States as an export market, which means that the slowdown in the US economy poses downside risks to the already under pressure Canadian economy. In our basic assumption of a soft landing in the US, we expect cyclical currencies such as the Canadian dollar to be supported. However, in this situation, the Canadian dollar should perform poorly.

Barclays stated that the high sensitivity to changes in the growth momentum of the United States means that as this southern neighbor slows down, the Canadian economy will face greater pressure, which may require the Bank of Canada to adopt a relatively more moderate interest rate stance, which could put pressure on the Canadian dollar.

The Barclays team expects that once the Federal Reserve starts cutting interest rates, the Canadian dollar will perform poorly, coupled with a loose positive correlation between the Canadian dollar's trade weighted exchange rate and the US dollar.

Barclays said, "As the Federal Reserve is about to cut interest rates for the first time, the market is interpreting whether we are transitioning to a hard landing, and the downside risk of the Canadian dollar is increasing. We will buy when the US dollar falls to 1.36 against the Canadian dollar

In recent weeks, the market has been confidently betting that due to a series of lower than expected economic data released by the United States at the end of July, the Federal Reserve will start cutting interest rates from September and will do so multiple times thereafter.

However, the United States is still considered on the road to a soft landing, and the upward potential of the US dollar against the Canadian dollar will be greatest in the case of a hard landing, which may see the Canadian dollar strengthen in trade weighted terms.

The Barclays team stated, "Among cyclical commodity currencies, the Canadian dollar has the lowest beta coefficient against safe haven shocks. This means that despite the direct negative impact of the US economic recession on the Canadian economy, the Canadian dollar may perform better than other cyclical commodity currencies during a hard landing

They added, "In our basic assumption of a soft landing, combined with domestic background and historical experience, the performance of the Canadian dollar will be inferior to other cyclical commodity currencies

The close correlation between the Canadian dollar and the US dollar means that the pound against the Canadian dollar usually falls when the US dollar against the Canadian dollar rises, and vice versa. When the US dollar against the Canadian dollar falls, the pound against the Canadian dollar rises.

Daily chart of USD/CAD exchange rate