USD/CAD to decline towards 1.20 as loonie set to catch a bid from BoC tapering – NBF

After hitting a multi-month low of 1.20 to the USD on June 1, the Canadian dollar has given back 5 cents. This against a backdrop of stronger-than-expected economic growth, rising oil prices and a larger Canada-US differential 2-year government bond yields. Economists at the National Bank of Canada are adamant that the CAD has room for appreciation, considering the macro drivers that normally underpin the loonie.

CAD to appreciate in the third quarter

“The sentiment indicator of Bank of Canada’s Business Outlook Survey improved further from its already-impressive spring reading. Its Q2 indicator of 4.2 was a third consecutive reading in positive territory and the highest on record by a fairly wide margin.”

“Improving business sentiment is translating into employment growth. The labour market added 231K jobs in June, topping the consensus expectation by a wide margin. This situation is markedly different from that in the US, where employment in the top three metro areas is higher than in 2007. The divergence on the jobs front is also evident in the movement of home prices.”

“Since we expect good-news jobs prints in the summer months as more people rejoin the labour force, we see inflation staying relatively stick and little reason for the Bank of Canada to remain as accommodative as it has been.”

“We are expecting another $1 B taper of weekly QE purchases in July from $3 B to $2 B. We think this could be the impetus for a reconnection of the CAD with its fundamentals and catch a bid. We see USD/CAD at 1.20 by the end of the third quarter.”