USD/CAD: Over the medium term, look for loonie weakness - CIBC

According to Avery Shenfeld and Katherine Judge, analysts at CIBC, point out that the Canadian dollar should weaken over the medium term, as domestic fundamentals take over from international forces. They forecast USD/CAD at 1.31 by Q2 2019 and at 1.34 by Q4. 

Key Quotes: 

“The oars aren’t rowing in the same direction for the Canadian dollar, but over the medium term, look for loonie weakness as domestic fundamentals take over from international forces. The latter pertain to the general trend in the US dollar against other majors, where 2020 should feature a weaker greenback as the Fed opens the door to at least one rate cut after a final hike in the latter half of 2019. Generally, a softer DXY tends to be associated with Canadian dollar appreciation.”

“The Bank of Canada still seems inclined to find an excuse to hike rates, with one final hike possible in Q3 after an oil production recovery shows up in temporarily better GDP prints. That will keep the Canadian dollar betterbid, towards a 1.31 low for dollar-Canada this summer. But made-in-Canada forces should put the BoC back on hold, leaving trade fundamentals to send the Canadian dollar to weaker levels over our forecast horizon.”

“Our recent analysis of these trade troubles makes the case that a 1.40 handle on dollar-Canada will eventually be needed to gradually restore export competitiveness. We’ve weakened our targets for the loonie in 2020 as a result, calling for a 1.36 dollar Canada to close out 2020. In addition to a wide current account deficit that helps pull the loonie that way on its own, beyond 2020, we might also get help from a more dovish Bank of Canada to generate a weaker CAD.”