USD/CAD: A temporary correction lower for the loonie following recent strong gains – MUFG

During June the Canadian dollar weakened against the US dollar from 1.2079 to 1.2388. The loonie showed its relative resilience again – while it was a month of across-the-board US dollar strength, the CAD drop was less than most other G10 currencies. Looking ahead, economists at MUFG Bank expect CAD gains to moderate. 

CAD can remain well supported and advance modestly further over the forecast period 

“The Bank of Canada as expected left its monetary stance unchanged in June but by the July meeting we should be seeing more evidence of the economy rebounding after the slowdown that emerged in April and May.”

“The job losses over this period and the weaker GDP print for Q1 have been played down by BoC officials suggesting no change to the path of moving toward the timing of the first rate hike. The July meeting will also be when we get forecast updates and these will likely justify a further slowing of QE purchases, likely from the current CAD3 B per week to CAD2 B.” 

“Despite the FOMC-fuelled jump in short-term rates in the US, the US-CA 2yr swap spread moved in favour of CAD strength in June which helps explain the relative resilience of CAD in the face of USD appreciation. But we maintain only a modestly stronger CAD profile with caution warranted.” 

“Our crude oil forecasts indicate we have seen the peak and prices will decline in Q3, albeit modestly, while the BoC is currently reviewing its policy mandate with the 5-yr cycle for renewal this year. Some greater flexibility on inflation overshoot could be the outcome which may dampen rate hike expectations now priced in the market.”