USD/CAD:  Healthier fiscal position and less reliance on external borrowing should provide a limit to the upside – RBC

Josh Nye, Senior Economist at RBC, explains they see more upside coming in USD/CAD but not record highs. They forecast USD/CAD will trade at 1.46 (68.5 in US cents) during the second quarter and at 1.43 (69.9) in the third. 

Key Quotes: 

“Canada’s currency was worth 77 US cents at the start of the year but lost 10% of its value in recent weeks, dropping to a four year low of just 69 cents before recovering slightly in the past few days. Broad strengthening in the US dollar has been a factor—the greenback was at times up more than 9% against all currencies (on a trade-weighted basis) and about 7.5% higher compared with advanced economies. Among the latter, Canada is joined by other commodity producers (Australia, Norway) and countries launching new quantitative easing programs (New Zealand, Australia again) in seeing double-digit declines in their currencies.”

“That the Canadian dollar has weakened in an environment of significant risk aversion, collapsing energy prices, and general demand for US dollars is unsurprising. Given continued uncertainty over the depth and duration of coronavirus containment measures, it’s too early to say whether risk appetite or oil prices have hit bottom. New easing announced by the Bank of Canada—it cut the overnight rate to its effective lower bound and launched its first QE program on March 27—could also send the currency lower as markets continue to digest those moves. But we don’t think the Canadian dollar is headed for its all-time low of 62 US cents seen in the early-2000s.”

“The Canadian dollar’s darkest days have come amid periods of financial market volatility, from the 1998 Russian financial crisis and LTCM collapse to the dot-com bust in the early-2000s. The same dynamic is at play now as investors grapple with an unprecedented, sharp downturn in global economic activity. The Canadian dollar’s stronger relationship with oil prices (compared with decades ago) isn’t helping. But a healthier fiscal position and less reliance on external borrowing should provide a backstop. 69 cents (CAD/USD) might not be as bad as it gets, but we doubt 62 cents will come into view.”

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