USD/CAD: Greater downside risks emerge for the loonie – MUFG

Analysts at MUFG Bank revised to the downside the forecasts for the Canadian dollar. They see USD/CAD at 1.3400 during the first quarter of next year and at 1.3200 during the third quarter. 

Key Quotes: 

“The Canadian dollar weakened in November although the low-yielding G10 currencies and AUD performed worse. However, we are beginning to see greater downside risks emerge for CAD than what we had assumed before. Previously we had a soft downward profile for USD/CAD but much of this was premised on the Fed cutting again in 2020, certainly once and possibly twice. We also assumed the BoC would ease as well. We no longer see the Fed easing again (although downside risks suggest it’s still possible) while we maintain the BoC is still likely to ease, in part reflecting the fact that the BoC has not acted as of yet despite many peers easing this year.”

“CAD is also the top G10 performing currency on a year-to-date basis helped by a relatively resilient economy. But with the US economy slowing further in 2020 and with global growth remaining subdued, we are sceptical of Canada remaining isolated from the global slowdown. Add to that the MUFG oil view of a potential supply gut putting downward pressure on crude oil prices and you have further reason to cite increased risks of greater CAD depreciation ahead than we have assumed in our previous forecasts. Furthermore, the passing of the USMCA deal in Congress is unlikely to lift CAD much given the expectations are now high that a deal will be ratified. Similarly, a US-China Phase 1 deal will only have a temporary impact given our view of a slowing US economy and the prospect of oil prices declining next year.”

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